Tech workers marching at Gay Pride San Francisco 2019

Guest post by Luciana Carvalho, VP of People and Performance at Movile

Surviving in the post-lockdown economy is going to be the most important test that many business leaders have ever faced. It is during such extraordinary times that we will find out if our management best practices are indeed the right practices for these novel circumstances and what needs to be adjusted.

A widely accepted tenet of management teachings is that building a strong company culture is very important because it acts as a strong foundation for the entire organization.

Companies with a strong culture have a competitive advantage. Daniel Coyle in his best-selling book “The Culture Code” makes the case that the secret behind highly successful teams is due to company culture. Coyle offers the example of Overture, which invented pay-per-click advertising. Google ended up acquiring Overture because its company culture allowed its teams to move faster and grow bigger.

We are about to discover if company cultures can keep businesses afloat during times of extreme crisis. Is a company’s culture sufficient to weather the storms? What are the factors for keeping teams motivated during extraordinary times with unpredictable outcomes? What can be done to strengthen company culture? These have become common questions within every type of organization.

I’d like to share some insights from my career, which I think can help strengthen company culture and improve the odds of survival during these harsh times.

Leaders are the example

It may seem obvious that leadership is important in times of crisis but it is doubly important because that’s when people notice it the most.

Gianpiero Petriglieri, a researcher in leadership, recently wrote an article about “toxicity of leaderism and … the harm it causes.” He argues for elevating the role of managers to leaders. It is “what we need most of all and yet continues to elude us. That is, competent managers who are entrusted to lead.”

Whoever does the job of leading will need to do it for the entire organization. They need to set the tone, the energy, and be able to communicate a strategy of moving forward to every part of the organization.

For example, among the CEO’s many leadership duties is being a “Chief Excitement Officer” because motivation cascades down from the top. And the CEO needs to be in touch with everyone: internally with staff and suppliers and externally with customers and investors.

As in wartime, employees instinctively look to their leaders for information, like should they be scared about their jobs or should they be vigilant about competitors? They need real information. It needs to be brutally honest because anything else damages trust.

I’ve seen this type of transparency in information become an important strategy in strengthening company culture during tough times ― and Brazil has had plenty of downturns and political instabilities; many more than in western countries.

Communication with staff can be done through open dialogues with the entire organization, or by adopting new practices that then become a future habit.

The easy accessibility of leaders during critical times is very important because it helps everyone in the organization stay on the same page and it shows we trust our people, which in turn makes them feel more secure.

Here at Movile, we make videos where our leadership openly explains our positions on key matters and is able to preempt certain questions. We share stories of both success and failure because we believe there is as much, if not more, to learn from failures compared to success stories. This transparency strengthens our culture.

Which brings me to my next insight.

Transparency as a strategy

Transparency brings to mind something that is “crystal clear,” but this is rare because in reality, we are always in situations where nothing is very clear. So you must equip your teams with as much information as is possible. Tell them about the strategies, the next steps, and the immediate short-term actions needed.

Transparency in information is an extremely strategic practice especially when it is able to spread out the decision-making within the organization; when it gives team members the confidence that they have the best information to make the right decisions.

Otherwise, during times of crisis and fast-changing events, teams can become paralyzed with indecision. Transparency in information empowers teams because they understand how to move the business ahead.

Management updates should be communicated in an open forum with easy access for employees who are offsite or in overseas offices. This brings me to my next insight about work.

From systems of control to systems of results

The global COVID-19 lockdowns have forced every company to adopt and adapt to remote work because most team members need to remain at home. Not everyone was happy with this new normal because few organizations had the company culture that was comfortable managing remote teams.

A new fact of life is the potential return of lockdowns as future infectious waves emerge. This means every company needs to be super comfortable managing remote teams in their homes, and having work processes in place that support their productivity.

Management needs to recognize the additional pressures faced by their staff who are working from home; especially in households with young children.

Our regular systems of control based on hours does not take full advantage of the flexibility of remote workers. It is best to let them decide on how to organize their work and shift a company’s management priorities towards a system of results.

Jim Ludema and Amber Johnson at the Center for Values-Driven Leadership at Benedictine University, wrote that it is important for leaders to “trust their team members and validate that trust by watching organizational productivity, not hours. This allows them to celebrate their team’s performance without micromanaging the time clock.”

And a system of results helps build a culture of meritocracy where results and not favoritism are rewarded.

Preserve the core and build out the base

These harsh times are the best times to examine your company culture and decide what is core to it. And, how it can be strengthened through new practices.

Here at Movile, we are helping our people adapt to the crisis and deal with the pressures of working from home. This includes advice and warnings about medical issues and recognizing the mental health issues around loneliness and anxiety.

We are also experimenting with various tools and processes because we’ve been forced to move all our office interactions into virtual worlds. We are still trying to figure out how to celebrate our successes with virtual champagne, and how we can virtually recreate those interactions during coffee breaks when we are not in the same building.

Adopt and adapt

The best company culture for these times is one that is highly adaptive and readily able to adopt new ways of working. During times of crisis, every company responds differently. There will be new rites and rituals and new habits established. New ways of winning will be found. And new practices such as transparency in information will bond teams together in spirit and purpose so they can successfully tackle hard challenges.

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Luciana Carvalho is VP of People and Performance at Movile, an investor in an ecosystem of leading technology companies it operates globally from its headquarters in Sao Paulo, Brazil. Carvalho is one of the chief architects of The Movile Way, a methodology taught at Harvard and Stanford universities for building high-performance teams and a culture that is encouraged to take risks, be fearless, and dream big.

Two major reports on venture capital activity from PricewaterhouseCoopers/CB Insights and the National Venture Capital Association (NVCA) showed a steep drop in US venture capital investments in the last months of 2016 but a strong overall year. 

The fourth quarter seed and angel deals fell 43% to their lowest level since 2012. And late stage deals dropped to the lowest level since 2009, according to data from NVCA’s Pitchbook.

A rise in exits is essential in attracting further investment capital. However, investments outpaced exits by a multiple of 11.2 – the highest ratio in more than a decade and exits equalled $47 billion – at 2011/2012 numbers.

However, a more favorable IPO market is expected in 2017 because of well managed and well performing startups lining up for their public debut. 

The MoneyTree Report from PricewaterhouseCoopers and CB Insights found that fourth quarter US deals fell 16% in number and 20% in dollars compared with the prior year. The global full year

 2016 decline was 10% and 23% respectively.

Artificial Intelligence was the hottest area with $705m funding moving into 71 deals in the fourth quarter. One of the big funding losers, surprisingly was Cybersecurity startups reported MoneyTree.

After rising into Q3’16, US Cybersecurity funding plunged 51% to $370M. Deals also dropped to 32, down from 40 in the previous quarter.

“For those who predicted 2016 would be the popping of the venture bubble, it was not. Yes, it was a tougher year in terms of deal activity and funding, but versus 2014, which we can call a more normal period, 2016 compares quite favorably,” said Anand Sanwal, co-founder and CEO of CB Insights.

Looking forward to 2017, Sanwal expects new big investors from the Middle East and Asia to offset any declines from other investors.

MoneyTree reported that Silicon Valley had a steep drop in new capital investments of 37% and 22% fewer deals compared with the third quarter. New England funding fell 41% in the same period.

First quarter 2015 Silicon Valley venture capital investments totaled $5.4 billion in 327 deals, representing nearly one-quarter of all VC investments globally. [Source: Pitchbook]

The median pre-money valuation of a startup jumped by 35 per cent in just one quarter to $40.7 million. Industries funded: $2.1 billion in IT  $1.2 billion in healthcare; $1 billion into B2C. A regional breakdown of VC investing: Visualizing VC activity in 1Q ’15 by geography | PitchBook Blog

Uber CEO Travis Kalanick Photo: JD Lasicka

Casey Newton in The Verge has a great story about how Uber, the San Francisco ride app startup, is trying to sabotage its rival Lyft by hiring people to call and cancel thousands of rides.

So much for the top innovator wins in Silicon Valley. These are very unethical and sleazy tactics:

Using contractors it calls "brand ambassadors," Uber requests rides from Lyft and other competitors, recruits their drivers, and takes multiple precautions to avoid detection. The effort, which Uber appears to be rolling out nationally, has already resulted in thousands of canceled Lyft rides and made it more difficult for its rival to gain a foothold in new markets. Uber calls the program "SLOG," and it’s a previously unreported aspect of the company’s ruthless efforts to undermine its competitors.

This is Uber's playbook for sabotaging Lyft | The Verge

Uber's management claims to have never ordered ride cancellations by its brand ambassadors but The Verge has several interviews and has seen internal documents that show that Uber is lying.

With Lyft’s arrival in New York imminent, Uber said it was creating a "street team" charged with gathering intelligence about Lyft’s launch plans and recruiting their drivers to Uber. Contractors were then handed two Uber-branded iPhones and a series of valid credit card numbers to be used for creating dummy Lyft accounts. Uber assumed every contractor would be caught by Lyft eventually; the second phone, according to a contractor interviewed by The Verge, was issued so "you would have a backup phone if and when that happened so you wouldn’t have to go back."

Uber's CEO and co-founder Travis Kalanick is 38 years old so he's not a twenty-something entrepreneur unsure of what's right or wrong in business. Would companies want to partner with Uber knowing that the startup plays by different rules and will lie and cheat? It doesn't build trust in management and it won't build a corporate culture that's honest and truthful. 

Uber raised a D Series in June of $1.2 billion. Investors were Google Ventures, Kleiner Perkins Caufield & Byers, Menlo Ventures, Summit Partners, Fidelity Investments, BlackRock and Wellington Management. Do such august and respected investment firms want to be associated with such uber-unethical practices? 

VC firms should make sure that their portfolio companies agree to adhere to the same codes of ethics that they themselves subscribe to. I assume they all have codes of ethics. 

Peter Delevett at the San Jose Mercury News reports that Tim Draper (above at a 2012 Golden State Warriors basketball game) and John Fisher from Draper Fisher Jurvetson, won't be leaving the firm, contradicting a Fortune report. DFJ is one of the first Silicon Valley VC firms.

However, there are changes afoot:

The firm said the co-founders and several others reported to be transitioning out remain managing directors there "and will continue to manage existing portfolio responsibilities."

DFJ did confirm that Tim Draper will not help oversee the firm's next fund, though he will personally invest in it... Draper, 55, will spend an increasing amount of time on Draper University of Heroes, the San Mateo school for entrepreneurs that he founded earlier this year.

Draper is one of Silicon Valley's more high-profile investors, thanks both to a flair for zany stunts and to his family's roots in the venture industry. His grandfather helped set up one of the first venture capital offices on the West Coast, and dad Bill Draper has financed hundreds of tech companies. 

Venture firm DFJ denies report that co-founders Tim Draper and John Fisher are on the way out

SF/Silicon Valley Public Schools should be showcases not basket cases.

Here’s a fabulous initiative led by New York city’s most successful VC, Fred Wilson of Union Square Ventures:

My colleagues at The NYC Foundation For Computer Science Education and I are raising a $5mm seed fund to invest in computer science education in the NYC public school system… and now we are now opening it up to others who want to participate alongside of us.

A VC: The Computer Science Education Fund

It’s a wonderful idea that needs to be replicated here in San Francisco and Silicon Valley public schools. Our public schools are broken but they should be showcases for Silicon Valley and not basket cases with nearly 50% dropout rates.

Fred Wilson writes:

I got to this place initially out of self interest (how to get more coders for our portfolio companies in NYC?), but it quickly became about way more than that. When you walk into a school and see kids from neighborhoods like Brownsville and the South Bronx sitting in front of laptops and making software using modern tools like Ruby On Rails, Github, and StackOverflow, you see a pathway for them and for our city and for our country to change what ails us.

Who will step up from our West Coast community and meet the challenge thrown down by Fred Wilson and his colleagues? Mark Zuckerberg I bet. But maybe the Life under Glass brigade will feel their smart watches buzzing that’s it’s time to pony up the money and the organization?

Go West…

Or maybe the cynical and insular VCs of Sand Hill Road will sit back and wait for the NYC kids to head west like the others have done? And thank the East Coast VCs for training up the next generation of foot soldiers for Silicon Valley’s startups.

But that trek west might not happen. Urban density means many new startup ideas will be born from experiences and problems New York city kids and their families face daily. Some of those ideas will be truly groundbreaking and Fred Wilson and his pals will be positioned at the head of a potential gold mine of deal flow.

Start local, go global. The next big ideas will come from dense urban centers where kids and their families are dealing with common problems. And by being able to code they’ll be able to quickly throw together some great ideas. 

Silicon Valley techies sit inside their gilded cages, being fed gourmet meals, and talking to themselves; they don’t interact much at all with the communities of regular people that live around them. Not many great ideas will emerge when they don’t emerge. That’s why there’s so many To Do lists and email management apps.

Ugly ducklings of NYC…

There's bound to be some wonderful Black Swan startups that'll grow from the ugly ducklings of New York's public schools... Again, Silicon Valley only funds a meritocracy of male Ivy Leaguers, all have the same experiences and think the same, which is not a formula for generating startups that make a difference, by being different.

A lot of the obvious low-hanging fruit has been exploited with software/web apps, and the next generation of opportunities will be more domain specific, and that means knowing your domain. Urban cultures have many domains and some are common to all other urban centers.

I wish the New York educational venture great success and I hope it inspires many copycats!

Silicon Valley VCs had better start pooling their money and set up a similar educational venture here in our public schools otherwise they’ll be missing out on the next blockbuster startups. It’s not a lot of money and our VCs could do with a better quality deal flow. Collectively, they aren’t doing that well.

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A VC: The Computer Science Education Fund

10-Year Study Erases VC 'Smart Money' Claims -SVW

He quotes investor Hunter Walk to make his point, and his point is that:

Angel List Syndicates are turning angels who have traditionally been followers into leads...they will have to learn to lead and lead well. They will have to step up before anyone else does. They will have to negotiate price and terms. They will have to sit on boards. They will have to help get the next round done.

Essentially they will have to work.

I agree with Mr. Wilson, that it could be a problem if angel investors have to work to get their money back -- plus a black swan premium. 

Over time we will get to see who is actually good at this and who is not. And I can tell you this. Not everyone is good at this.

Without leadership of the right kind, it's going to be tough for the AngelList syndicates to match the performance of VC smart money. They will have to measure up to the average annual 8.5% growth rate of the S&P 500 Index -- which has outpaced the 7.5% growth rate of all VC investments over the past decade.

It's a strange post for Mr. Wilson to make, to be critical of one of Silicon Valley's most innovative angel investment networks.

New SEC rules allow startups to publicly seek investors via any type of marketing but they have to publicly disclose their business plans to every potential investor, and follow strict rules on funding or risk being banned from raising money for at least a year.

Mr. Wilson and his colleagues at Union Square Ventures are situated deep within the narrow aristocracy of New York's deal flow. Surely, this is where the best deals will continue to be presented first because private deals keep things private and that helps deter copycat ventures and other problems?

VC Mark Suster in Los Angeles, is a big proponent of private deals: The Importance of Proprietary Deal Flow in Early-Stage VC

However, Mr. Wilson is clearly feeling the heat. Will the new public funding rules and mushrooming angel networks  steal deal flow from the top tier of VC investors? I didn't think it would but maybe Mr. Wilson is right to be concerned. 

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A VC: Leading vs Following

10-Year Study Erases VC 'Smart Money' Claims -SVW

It's unusual for a publicist to be featured in a big spread in a large newspaper  since it's usually clients that are supposed to get all the attention, but Margit Wennmachers decided to get some ink for herself for a change, in the San Francisco Chronicle.

She is the co-founder of PR firm Outcast Communications and works as one of 24 partners at VC firm Andreessen Horowitz. She's been working there since June 2010, nevertheless, reporter Nellie Bowles describes it as "her new venture." 

I've known her for many years, especially when she worked at Outcast and she is indeed a tremendously capable person, deserving of a tremendously fawning article:

… everyone in the room needs Wennmachers, who has quietly become one of the most powerful people - man or woman - in Silicon Valley.

When New York Times tech reporter Quentin Hardy told Wennmachers that he thought Nicira was too wonky for a long story, she asked him out to lunch at Boulevard to make her case for the company…

After Hardy's story - headlined "Startup Nicira plans to disrupt networking giants" - Nicira, which had initially been valued at $500 million, was bought by VMware for $1.26 billion.

I think that Quentin Hardy might not be pleased about this account of being dined at one of San Francisco's top restaurants and then pumping out a winning article. 

Her boss, Marc Andreessen called her a "stealth submarine" and "the mother of Silicon Valley." 

And she's very discreet, although she did mention a story about some "guy who ODd in a hotel room."

I wonder how many reporters put these descriptive touches into their profiles of male VCs:

…the whip-thin Wennmachers wore paisley cropped pants and white leather Prada heels and was chewing gum.

And,

Over lunch at the Grove on Fillmore (one of her favorite spots), Wennmachers, wearing a whimsical shirt with peacock feathers and a metal eggshell necklace…

Would she have described lunch with Marc Andreessen as, 

Over lunch at Hobee's, Andreessen, wearing a whimsical blue shirt over tan trousers, and a metallic glint off his egg-shaped dome…

There's a huge list of her achievements: from her origins at a mushroom-turned-pig farm in Germany, to the sale of Outcast, and her single mother status. When the reporter asked the father's name, she replied: "He's not famous."

Maybe you need to be a client to get your name in the paper?

Marketing guru Margit Wennmachers' new venture - San Francisco Chronicle

AngelList is a competitor to other early startup investors and some VC firms. Dan Primack at Fortune, reports that AngelList has raised money at a $150m valuation:

Fortune has learned that AngelList recently raised around $24 million at a valuation in the $150 million range. Atlas Venture and Google Ventures helped lead the round, which included participation by more than 100 other institutions and individuals. Among the more notable names are Kleiner Perkins Caufield & Byers, Draper Fisher Jurvetson, Marc Andreessen, Max Levchin and Ev Williams…
. . . one reason the company raised money from so many different sources was so as not to appear beholden to any particular firm or individual.

A change in SEC rules goes into effect Monday, allowing startups to pitch publicly instead of in private meetings. Investors will still need to be accredited — startups will have to make sure that they are rich enough to invest otherwise they could face serious problems and be prevented from raising money for up to a year.

Startups will have to tell the SEC in advance that they are fundraising and must agree to make sure all information told to investors is made public. 

Foremski's Take: The change in SEC rules means that more investors will have a chance to maybe find the next Google or Facebook instead of the insider cliques of Silicon Valley having access to all the deals.

It also means good news for the media outlets covering the startup sector since that there will be more information available publicly about who is raising money, and about the performance of these private companies.

One risk is that public disclosure of business performance by a startup could raise them into the cross-hairs of  larger firms, and their business model could become the target of copy-cat ventures. This means the best startups will continue seek private meetings with investors leaving the less promising companies to solicit in public venues.

Black swans…

However, it's always the ugly ducklings rejected by the establishment that become the black swans and return massive amounts to their lucky investors. So there will be some high profile winners among less well connected investors, which will undoubtably encourage others, and raise the total amount of early stage capital available. 

AngelList plans to help startups with their new SEC obligations, and create a public pitching site to take advantage of the new rules.  It is also promoting a novel affiliate model that rewards intermediaries in raising money for startups from their networks.

Angels, or networks of small investors such as AngelList, have taken over most of the early stage investing in Silicon Valley startups, allowing VC funds to concentrate on larger, later stage deals that can help scale young companies towards a potential IPO, or make it as a stand alone company.

It's not clear if the change in SEC rules will improve the success rate. Less than 10% of early stage startups succeed in growing larger or in being sold to a bigger company.

Few have the ambition to be independent and most angel investors would rather see an early sale than face dilution and the long road to getting their money back.

Delphix is one of the only startups I've come across lately that is well positioned to becoming a major software company in Silicon Valley. 

- - -

Please see:

The Dirty Little Secret Of Silicon Valley's Startup Boom...It's A Jobs Fair For Giant Corporations

10-Year Study Erases VC 'Smart Money' Claims

Delphix - SVW 2012 Startup of the Year - A Standout Company With Standout Leadership

Speaking on stage at Techcrunch Disrupt conference:

"Maybe some percentage that's substantially larger than 95 percent of VCs add zero value. I would bet that 70-80 percent add negative value to a startup in their advising."

He said that most VCs "haven't done shit" to know what to tell startups going through difficult times.

That's not going to go down well in the Sand Hill Road Gulag, where the VC community has an extraordinary belief in the power of "smart" money, yet can't beat an S&P 500 index fund over a decade of investing. It's not a good time to be a VC.

[10-Year Study Erases VC 'Smart Money' Claims -SVW]

The comments could come back and haunt him, since it will attract attention to Mr. Khosla's investments, particularly in clean tech, a sector that struggles to show the same kinds of scalable profits that web services and enterprise tech startups are able to achieve.

His Khosla Ventures fund features a celebrity "advisor" Tony Blair, the former British prime minister.

His "harmless" advice to startups is: "Founders should listen politely and just do what they want to do anyway."

Serial entrepreneurs already know that, but first timers don't and likely won't do that because they are too young, and  too naive. Plus, what's the point in VC investors if they can't provide any value beyond a checkbook? It's better to pursue alternate funding that doesn't require a board seat.

Dave McClure, (above) the successful founder/investor of 500 Startups, posted a great response to a post by Sarah Lacy in which she defends the need for traditional VC firms of Sand Hill Road against claims of a broken and disrupted VC model:  A rare defense of venture capital classic | PandoDaily

Here's a lightly edited version:

While the opportunity to raise shitloads of capital to grow companies is never going to go away, the organizations they raise it from, the process they go through, and the dilution they take as a result are changing pretty dramatically.

More specifically:

- How many "traditional" silicon valley VC firms would bet over $250M on single company. (Google Ventures & Uber.)

- How many "traditional" silicon valley VC firms spend millions of dollars building out non-investment resources to help with biz dev, corp dev, recruiting, etc (Andreessen-Horowitz).

- How many "traditional" silicon valley VC firms create micro-funds aimed at funding college students (First Round Capital, Founders Fund).

- How many "traditional" silicon valley VC firms create online platforms in only 3 years that are facilitating $150M in transactions per year at ABSOLUTELY NO CHARGE and are growing over 100% per year (Angel List)

- How many "traditional" silicon valley VC firms help over 100 companies per year get funded, on less than $50-100K each, and help those companies achieve Series A level valuations (Y Combinator).

- How many "traditional" silicon valley VC firms have funded over 500 startups in only 3 years, with over 150 of them from outside the US across 35+ countries. (500 Startups)

Now some of them may look like traditional funds managing billions (A16Z), and some of them may look like seed funds (FRC), but they sure as hell aren't the same structure & approach to venture capital as the folks who started the business 40-50 years ago.

More importantly, they sure as hell aren't the same folks on Sand Hill Road who are doing the same old shtick for the past several decades.

Now there's nothing wrong with being a traditional $250-500M fund with smart, connected people who sit on board seats and write a few $5-20M checks every year. But to suggest that those folks are all our industry ever needs, and that these folks aren't facing substantial disruption themselves in the past few years/next decade... 

 

Please See:

 10-Year Study Erases VC 'Smart Money' Claims -SVW

VCs Hire Lots Of Women - But Not As VCs

Marc Andreessen, Bill Maris, and John Doerr, are some of the smartest investors in tech, says Wired.

The National Venture Capital Association (NVCA) and Cambridge Associates recently released a study showing that VC funds returned an average of 7.4% annually over a ten year period. For early stage funding it was just 6.4%. This compares to 8.5% for the S&P 500.

Foremski's Take: The VCs of Sand Hill Road have an unshakeable belief in their investment skills, despite the study's Big Data showing they can't outperform a grandmother investing in an S&P Index fund.

 It's easy to see how "smart money" VCs end up with dumb money returns, when they herd into the same types of me-too startups and ruin the market for each other; or force their portfolio companies to pivot their business plans based on the trend du jour in their Twitter streams.

Add to that, imposing toxic term sheets onto a startup's founders -- and it's no wonder they are increasingly despised in startup communities on both coasts.

Random picks

The VCs are extraordinarily bad at picking winners. It might be better to assign investments to a wide variety of startups on a lottery basis.

I can guarantee there would be far fewer me-too startups funded; and the next big thing is always the ugly duckling no one wanted so you might just get lucky and get that black swan event -- an extraordinary return on investment. It certainly won't happen by following the groupthink of the gulag. 

A funding lottery for pre qualified startups could work. Random acts of funding will hit gold some of the time and probably about the same number of times as "smart" funding.

A long line...

There's always been plenty of people that would love to prick VC egos but lately, their numbers seem to be rising. Others see it too.

R. Scott Raynovich at The Rayno Report writes that, "a quiet attack is building on the VC industry."

"Entrepreneurs and tech-company executives I have been speaking to lately have turned up their griping about VC investing, pointing out that it's dysfunctional and overrated."

Mr. Raynovich points out that a small number of VC firms have done well:

"Accel Partners, Sequoia Capital, Andreessen Horowitz, and Greylock Partners, which was recently profiled in this interesting Bloomberg BusinessWeek article... Greylock was invested in Facebook (FB), LinkedIn (LNKD), Pandora Media (P), Workday (WDAY), and Palo Alto Networks (PANW). That seems like more than luck."

However, the lack of data on individual VC funds makes it hard to judge performance; how much luck or brains, separates the cream from the whey.

Every VC company is a media company...

Keeping up the VC myth of "smart money" is tough when the Big Data shows it's clearly not. But there are tried and true methods to keep the hot air pumping up the hype using traditional means: PR and media.

Andreessen Horowitz, with more than $2.7bn under management in three funds, is leading the way. The firm recruited Margit Wennmachers, the co-founder of PR firm OutCast Communications as a partner; and more recently, it hired Michael Copeland, a senior editor at Wired magazine.

Some its partners have made private investments in PandoDaily, the tech news site, and in local media stars such as Michael Arrington and his CrunchFund.

It's paid off well. The firm's founders have been regularly featured in the New York Times and other leading media outlets such as CNN. It's making other VC firms jealous and I hear that other VC firms are scrambling to do the same and boost their time in the spotlight -- rather than their startups.

Because it is all about the dealflow. Yes, you might turn down the next Google or Facebook --every VC firm has it's stories -- but at least you had the dealflow to turn down. Being constantly in the media is key to getting to see the best of the startups and that means more chances at beating the S&P500.

Hiring good journalists could be a good strategy for VC firms to differentiate themselves from the herd but I doubt it will work. The journalists will be simple employees at the beck and call of masters that always know better.

Inside the mirrored bubble their reflection looks so very good -- which is why we need an independent media -- to point out any distorted fantasies. It's good for all.

And there's no point in hiring journalists to produce puff pieces about the "Princes of Sand Hill Road" when there's plenty of PR people expert in kissing frogs.

- - -

The Dirty Little Secret Of Silicon Valley's Startup Boom...It's A Jobs Fair For Giant Corporations

Humor Tumblr blog Jesus Christ, Silicon Valley uses Sheryl Sandberg's "Lean In" manifesto as an excuse to paint incredibly realistic renditions of Sand Hill Road's venture capitalist innovation warriors, and their offices. It's funny because it's true. 

He points out that VC offices are full of women:

VCs have more females per capita than any other workplace. Entering a VC firm is like being Robert Palmer in his “Simply Irresistible" music video (that sound you just heard was the collective whoosh from every YC “founder"). Within seconds you’re surrounded by women offering you water, validating your parking, getting the appropriate laptop dongle from the dongle drawer, wiping away your chorizo remains.

…none of these women are in actual meetings, of course. 

Some days its tough being a VC:

- Sit-in on (half of) a pitch meeting, adding value with every value-adding breath. Also: enjoying a chorizo omelet.
- Devour daily Flipboard to maintain finger on the Fucking Pulse.
- Publicly Tweet other Valley ‘made men.’ Tally Favorites and Retweets to determine daily self-worth.
- Lunch with some founder. Rule: if founder is rich enough to not need venture capital, do whatever you can to get in the round. “Chad Hurley’s doing online taxidermy? I’m in."
- Phone wife to say you are too busy to make it home by bedtime — gotta work a “deal" at the Rosewood — gently shutting her up by reminding her about hybrid Lexus SUV, second home in Tahoe and Carmelita the housekeeper/nanny/chef. (Note: Carmelita is also leaning in… on her fucking mop, that is, so she can keep her kids barely housed in a market that caters to the pedantic concerns of the wealthy while zoning-out every possible lower-class incursion. But they can still watch our kids and shit, you know, so long as they don’t qualify for benefits.)
- Tweet a couple of links to portfolio companies’ products that you have’t tried, but must be absolutely killing it because the number of registered users doesn’t lie.
- Read the week’s most-heavily tweeted HBR article. Continuing education is a bitch!
- Use Retina Macbook’s spacebar to Quick-Look three pitch decks.

Read more and chortle here: Jesus Christ, Silicon Valley | Ladies of Silicon Valley: Lean Back

San Francisco based New Media Ventures is a network of 60 angel investors that funds startups that allign with its mission to drive "political innovation."

So far it has invested about $4 million in ten startups such as Upworthy, which was featured by David Carr in the New York Times; NationalField, TurboVote and the Story of Stuff. NMV looks for startups that combine new media with technology, and are passionate about shaking up the political process through greater citizen engagement.

Fast Company's Ariel Schwartz recently profiled NMV:

Meet The Network Of Angel Investors That's Funding The Next Generation Of Progressive Startups | Co.Exist: World changing ideas and innovation

NMV's roots lie in the Democracy Alliance, another initiative that funds progressive organizations... NMV, however, is more focused on early-stage, new media and tech-focused innovation--think the next MoveOn.org or Huffington Post.

The investments are not handouts, they are designed to build profitable companies so that their work can be self-sustainable.

NMV is very much aware of the tensions for-profit organizations can create in the political space where non-profits are the norm, and corporations of any size, even tiny startups, are looked upon with suspicion if they seek to profit from their work.

The Angel network plans at least 12 investments in 2013.

Mr McClure writes:

Recent articles by the WSJ, Fred Wilson, & others are noting a shift in investor interest to enterprise and away from consumer. If true, this is a huge error... at least for entrepreneurs, angels, and smaller funds. There is no better time than the present to build cheap & scalable software-based businesses that make money.

He points out that the business opportunities are far from over because of the simple fact that the Internet continues to grow at a fast pace and still has plenty of room to grow. After all, there are massive economic regions around the world that have yet to come online with the full suite of connection, payment systems, and physical infrastructure for e-commerce that we have in the US and Europe.

IMHO most VCs switching from consumer to enterprise are clueless about why they're doing so.

Foremski's Take:

I'm a big fan of Dave McClure and his work with his 500 Startups incubator and I agree with him that there are still a lot of very good business opportunities in the consumer web sector.

However, I'm also increasingly focused on the enterprise IT sector because it's a very good market for startups that know what they are doing.

Startups in the enterprise IT sector don't come from the same stables as Mr McClure's 500 Startups, or Paul Graham's Y Combinator. They aren't filled with fresh graduates in their early 20s. The teams have experience and knowledge from having worked in the enterprise IT sector, and they know the pain points that corporations will pay to have solved.

The enterprise IT market is a $3 trillion global market. Corporations have money and large budgets. There's still a lot of great enterprise businesses to be created.

Mr McClure writes that it's very cheap to start a consumer web company, which is true.

You won't be able to seed enterprise startups for as little as $30K to $80k each, as YC and others do. Enterprise startups need far more capital because they need high value team members that know their jobs extremely well, because they have held high value jobs within enterprises.

Higher startup costs mean that fewer me-too companies are created and ruin the market for everyone.

I disagree with Mr McClure when he claims that these days, it's, "cheaper to acquire customers than ever before." The noise level in consumer web sites is high and heading higher.

Setup costs for a consumer startup are low, and a top-ramen and dormitory lifestyle for your team keeps costs down, but marketing costs will increase tremendously.

Sure, some startups will get lucky and score some amazing viral effects that boost their growth at virtually no cost, but it's unpredictable. Successful businesses have to be built on predictable processes. Startups will have to get serious about their marketing strategy and that means spending serious money.

We live in a free speech society and the more money you have the more free speech you can have. The more attention you buy, the better your chance for success, and the better you'll obscure rivals, too. Marketing costs for consumer web startups will be higher in the future than they are today and that means more startup capital is needed.

Conversely, IT enterprise markets are far simpler, and it's becoming easier to target potential customers -- mainly because there's not that many compared with the consumer space.

Social and media technologies are gradually bringing down high marketing costs in enterprise markets. This will accelerate as people learn to use increasingly sophisticated customer acquisition technologies.

Predictable revenues is another nice feature for enterprise IT companies. Once you become an approved vendor to a large corporation, it means steady revenues and a chance to improve them with additional services.

In the fickle consumer web space, you can go from hero to near zero, at a reverse hockey stick rate, for simply redesigning your page, as Digg did.

Since consumer web startups will need a lot more capital because of rising marketing costs, it's easy to see why falling marketing costs in the enterprise space are looking good to investors.

Coming up: I have a profile of an excellent enterprise IT startup and a great example of the opportunities in enterprise markets. It's easily the company of the year for me, and I meet with a lot of companies. Find out who it is later this week.

I remember thinking that it was a good move for her, she had diligently stayed on for her earn-out years following the sale of Outcast to Next Fifteen Communications in 2005, and now she could sit back a bit and invest her hard earned wealth.

She has seen hundreds of startups in her work in PR, she's worked with many, and rejected far more. She has developed a good nose for successful businesses. That kind of experience is rare and now, I thought, it will be put to work in ways far more valuable than figuring out which journalist to pitch a news release to.

But, in reading today's New York Times article: Venture Capital Firms, Once Discreet, Learn the Promotional Game, it seems that she's more in-house PR flack than VC partner. I was quite disappointed.

She's extensively quoted as a spokesperson for the VC firm, she talks about her strategy of getting coverage for Marc Andreessen and Ben Horowitz, through dinner parties and more. Her firm has invested in blog sites such as Pando Daily. She even tells Messrs Andreessen and Horowitz what not to wear.

That doesn't sound like a VC partner but more like an employee working as an in-house publicist. I don't know any VC firm partners that do the things she does -- they hire people to do those things.

There's quite a few that can do a good job as a publicist but there's far fewer with the experience of Ms Wennmachers. Why not focus her talents on finding great startups instead of pitching stories about how brilliant the VC firms founders are at "self-promotion?"

Is this another example of Silicon Valley VC firms' old boy attitude towards women in their profession?

Looks can be deceiving, I will agree, but this looks like a very familiar situation to me.

It was interesting to see Margit Wennmachers, co-founder of Outcast PR, and now working at VC firm Andreesen Horowitz, so prominently quoted in the New York Times today:

Venture Capital Firms, Once Discreet, Learn the Promotional Game - NYTimes.com

She has done very well in getting a lot of ink for her employers, both the paper and electronic kind, in barrels and terabits. She's made them into the most visible VC firm in Silicon Valley.

The article notes that VCs have often sought the limelight, and that some, such as Tim Draper, from the oldest and foremost Silicon Valley VC firm, Draper Fisher Jurvetson, once agreed to wear a Captain America costume for the cover of Reuters' Venture Capital Journal.

She told New York Times reporter Nicole Perlroth, "I would never let Marc [Andreesen] or Ben [Horowitz] wear a Captain America uniform."

She's right, Messrs Andreesen and Horowitz would look ridiculous in that costume, with their bald heads glistening in the studio lights; they'd look more like the "Coneheads" than super heroes. But, a Batman and Robin costume is another matter, they could pull that off no problem -- and it would perfectly illustrate their close working relationship.

Tim Draper has the physique, and the hair, to look good as "Captain America" (photo below).

Mr Draper is well known for his playful nature and he loves dressing in costumes, even when he's not posing for magazine covers. The top photo is when I bumped into him courtside at the Golden State Warriors earlier this year. It was "Bollywood Night" but only he and the cheerleaders were dressed in theme.

Glooko is founded by Yogen Dalal from veteran VC firm Mayfield. Its investors include:

- Chamath Palihapitiya, the first Vice President of User Acquisition at Facebook

- Bill Campbell, Chairman of Intuit and Board of Directors at Apple.

- Vint Cerf, VP & Chief Internet Evangelist at Google.

- Judy Estrin, former CTO of Cisco Systems, Board of Directors at Walt Disney Company and FedEx.

- Andy Hertzfeld, Software Wizard at Google and a member of the original Apple Macintosh development team.

- Venky Harinarayan, co-founder of Cambrian Ventures and Kosmix (acquired by Walmart in 2011).

- Russell Hirsch, MD, Managing Director of Prospect Venture Partners.

Glooko has tested the market with a soft launch in Europe and said its app is the first on the market to work with all popular glucose measurement devices. The company plans to soon add features that will share blood data with people's doctors.

Users require a special cable to retrieve their data from their blood monitoring devices. A wireless connection is not available.

So what's special about what looks to be a simple app that collects glucose data? Clearly, there's more to this investment than meets the eye.

(Bill Draper, third from left.)

Wednesday I had dinner with Bill Draper and several startups around the theme of "Millennials" and how their online habits are determining the business models for a new generation of online services.

It was great to see Mr Draper, still pitching his investments, at 84 years old! He looked great and he's an excellent role model for how to age gracefully and energetically.

Mr Draper, born in 1927, is sometimes known as the "father" of Silicon Valley VCs. He started work at his father's investment firm, Draper, Gaither & Anderson in 1959. His is an illustrious career, take a look at this small excerpt:

He served from 1981 to 1986 as President and Chairman of the Export-Import Bank of the United States and was appointed to this position by President Ronald Reagan.

In 1986, he became the head of the world's largest source of multilateral development grant assistance, the United Nations Development Programme. As the second highest ranking individual in the United Nations, Draper oversaw nearly 10,000 international aid projects.

William Henry Draper III - Wikipedia

You might think that Mr Draper would choose to take things easy. But, he is also a great example of the tireless energy of Silicon Valley's investors and entrepreneurs - they keep coming back and doing it again, and again, and again.

Identified

His latest investment is Identified, an 8 month-old startup that raised $21 million earlier this week in Series B funding. It is co-founded by Brendan Wallace (below) and Adeyemi Ajao, a Spanish entrepreneur who sold his last company, Tuenti - described as a Spanish Facebook, to Telefonica for about $100 million in 2010.

The two met at Stanford university and are now running a rapidly growing startup with more than 10 million users, focused on becoming a type of LinkedIn for younger professionals in the 18 to 30 year demographic. About 90% of its users are under the age of 35 compared with LinkedIn, with 75% of its users over the age of 35. Most of the users on Identified are in the computer science field.

"No one has the amount of data that we have about this demographic. There's tremendous business potential in this area," said Mr Wallace.

Identified has about 50 staff, many are game designers recruited from Zynga and other gaming firms. They are working hard on an enterprise product that will help corporations identify and hire the talent they need.

Users of Identified are subject to "gamification" to extract ever more data from them, which will then be used to monetize the firm and propel its fortunes.

. . .

From the Wall Street Journal on a conversation between Mr Draper and VC Ann Winblad of Hummer Winblad Venture Partners at the Commonwealth Club in San Francisco:

On VC ego: "It (should be) less about themselves, and all about building great companies and supporting entrepreneurs, making sure the entrepreneur gets the credit... Some names come to mind of people whose egos would fill this room, but we won't name them."

...

"If a VC looks you in the eye and says he hasn't made mistakes, he's lying.

Virtual databases are able to increase the effieiciency of data centers and also help speed the development of web-based applications. Facebook is a Delphix customer. Tim Campos, Facebook's CIO, says that Delphiix is being used to help develop 11 projects simultaneously instead of just two.

Nick Sturiale, general partner at Jafco Ventures, and a board memebr of Splunk, said Delphix is "one of the most compelling value propositions" he's seen since Splunk.

New investors Summit Partners and Battery Ventures join lead investor Jafco, and Greylock Partners and Lightspeed Venture Partners.

Fourth-quarter deal making was particularly strong in cleantech and among biotechnology startups, but software, Internet, medical devices and IT services investing fell.

...

Investments for the quarter came to $6.57 billion with venture capitalists completing 844 deals... The totals were down 10% in dollars and 11% in deals from the third quarter.

Software was the largest investment category with allocated capital down 16%...

Internet investing fell a more precipitous 23%...

and medical devices commitments stumbled 35%.

Seed-stage investing of $134 million continued a year-long decline. For the year, seed funding fell 48% in dollars while deal volume was essentially flat.

For the year, venture capitalists put $28.4 billion into 3,673 deals, an increase of 22% in dollars and 4% in deals, the MoneyTree Report found.

Some of the fourth quarter trends don't look good but they have far to fall to become a problem. It is worth noting that 2011 was a very good year, the third largest amount of venture capital invested in the last ten years.

There are some interesting charts here and a slideshow.

It was a varied and interesting collection of startups. Here are some of my notes:

- George John from Rocket Fuel talked about the digital advertising business and how data mining is helping to improve results for advertisers. The company applies a wide variety of behavioral, contextual and other measures to improve advertising results.

The company uses various techniques to serve the right ad to the right person and to make those decisions in milliseconds -- a tough job especially when you have to query multiple, very massive databases.

- Steve Adams from VirtuOZ, provides a virtual agent that is used to provide support to a client's customers by leveraging advanced computer linguistics. He said that the virtual agents are so good that people sometimes ask them out on a date even though it's clearly labelled that they are conversing with a software program.

That's a new form of Turing Test I hadn't considered: instead of trying to emulate a human, computers are able to emulate a dateable human! Maybe Match.com should offer a virtual partner to its customers to practice real life encounters.

- Faye Pairman, from Panasas was very impressive. It provides storage for high performance data intensive applications. Files sizes run into the terabytes just for one file. Customers are dealing with massive amounts of data, such as those in oil, and life sciences.

- Rob Bernshteyn, spoke about Coupa, which helps companies save money on many of their business operating expenses, such as buying shelving, or sourcing local goods. It's a competitor to Ariba. The company compares similar businesses and develops a set of best sourcing practices that can add up to substantial savings.

- Andrew Dreskin, from Ticketfly, is trying to take on Ticketmaster. I wish him and his team all the luck they need, I hate Ticketmaster -- the most reviled brand in the US. But it's a tough job because Ticketmaster pays huge amounts of money to key venues to handle their ticketing. This acts as a formidable barrier to competition.

[Please see: My Ticketmaster Mugging... And Collecting Ticketmaster Horror stories - SVW]

-Q2 2011 VC investments jump 19% to $7.5 billion in 966 deals. Year ago: $6.3 billion in 814 deals

- Latest quarter is highest total since Q2 2008.

These high levels are not sustainable says Mark Heesen, president of the NVCA:

"For the past three years, the venture capital industry has been investing significantly more dollars into companies than it has been raising from institutional investors. This level of investment cannot continue if we do not start to see a pick-up in exits and, subsequently, fundraising. The money simply will not be available to invest. Ironically, our industry should be much less concerned about a bubble and more concerned about being in a position to adequately fund the tremendous opportunities out there in the next decade."

But some sectors have had good exits and that is fueling investments.

Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US:

"The exit market for both biotech and medical device companies has been active over the past year, and this has encouraged VCs to put more money back to work in this space. It also makes sense that we're seeing an increase in VC investments going to Internet companies, when you take into account the valuations on some IPOs that have priced recently, particularly in the social networking space. As long as the markets continue to reward these companies with attractive valuations, we would expect to see a strong level of venture capital funding in that space."

He added that at current levels 2011 could become the sixth most active year for VC investments in history.

Q2 Highlights:

Industry

- The Software industry received the highest level of funding for all industries with $1.5 billion invested during the second quarter of 2011. Up 35 percent in dollars compared to the $1.1 billion invested in the first quarter. The Software industry also had the most deals completed in Q2 with 254 rounds, which represents a 25 percent increase from the 203 rounds completed in the first quarter.

- Biotechnology industry returned to second place, rising 46 percent from the prior quarter to $1.2 billion in the second quarter of 2011. The number of deals also rose in the second quarter, increasing 20 percent to 116 from 97 in the first quarter of 2011.

- The Medical Devices and Equipment industry also experienced an increase, rising 26 percent in Q2 to $841 million, while the number of deals remained relatively flat at 90 deals in Q2.

- Investment in Internet-specific companies surged in the second quarter with $2.3 billion going into 275 companies. This level of investment represents a 72 percent increase in dollars and a 46 percent increase in deals from the first quarter when $1.4 billion went into 189 deals.

The second quarter marks the most dollars going into Internet-specific companies in a decade, since the second quarter of 2001.

- Ten of the 17 MoneyTree sectors experienced double-digit increases in dollars in the second quarter, including IT Services (19 percent increase), Media & Entertainment (27 percent), Consumer Products & Services (248 percent), and Semiconductors (22 percent increase).

Stage of Development

- Seed and Early stage investments rose 24 percent over the prior quarter in both dollars and deals with $2.4 billion going into 464 deals in the second quarter. Seed/Early stage deals accounted for 48 percent of total deal volume in Q2, compared to the first quarter when it accounted for 46 percent of all deals. The average Seed deal in the second quarter was $3.2 million, up from $1.8 million in the first quarter. The average Early stage deal was $5.8 million in Q2, down slightly from $6.0 million in the prior quarter.

- Expansion stage dollars increased 9 percent in the second quarter, with $2.3 billion going into 260 deals. Overall, Expansion stage deals accounted for 27 percent of venture deals in the second quarter, down slightly from 28 percent in the first quarter of 2011. The average Expansion stage deal was $9.0 million, down from $9.3 million in the prior quarter.

- Investments in Later stage deals increased 24 percent in dollars and 16 percent in deals to $2.8 billion going into 242 rounds. Later stage deals accounted for 25 percent of total deal volume in Q2, compared to 26 percent in Q1 when $2.2 billion went into 209 deals. The average Later stage deal in the first quarter was $11.5 million, which increased from $10.8 million in the prior quarter and represents the largest average deal size for Later stage companies since the first quarter of 2004.

First-Time Financings

- First-time financing (companies receiving venture capital for the first time) dollars increased 30 percent and the number of deals rose 22 percent with $1.5 billion going into 310 deals. First-time financings accounted for 20 percent of all dollars and 32 percent of all deals in the second quarter, compared to 18 percent of all dollars and 31 percent of all deals in the first quarter of 2011.

- Companies in the Software, Biotechnology, and Media & Entertainment industries received the highest level of first-time dollars. The average first-time deal in the second quarter was $4.8 million, up from $4.5 million in the prior quarter.

- Seed/Early stage companies received the bulk of first-time investments, garnering 61 percent of the dollars and 77 percent of the deals, an increase from 56 percent of dollars and 75 percent of deals seen in Q1 2011.

Tuesday afternoon I was in the "Gulag," the warren of Venture Capital firms along Sand Hill Road, to attend SharePost's conference on "Market Issues & Opportunities for Private Companies."

The conference room was packed and for good reason. The lack of IPOs over the past ten years has created a liquidity crisis: how do investors and entrepreneurs get some of their money out of their companies, many of whom are profitable enterprises?

SharesPost, which was founded by Greg Brogger in early 2009, offers a solution: a private stock market for privately held shares where wealthy, accredited individuals can buy and trade shares held by Angels, VCs, and employees of startups.

This secondary market has become controversial in several respects:

-It is a private stock market that the public cannot participate in but it's the only way to buy stock in hot companies such as Facebook or Zynga.

- There are grey areas where the Securities Exchange Commission has no clear regulatory powers but which might result in new rules.

- There are many potentially serious issues around insider trading, accounting, and tax and legal liabilities that have no clear precedents.

- It has created a divide in the VC community where investors are concerned that their startup entrepreneurs will cash out too much of their holdings, and that their motivation will become "misaligned" with the interests of the investors.

Joseph Grundfest, a former SEC Commissioner, and current W.A. Franke Professor of Law and Business at Stanford Law School, presented the keynote. He made a strong case for bridging the "chasm" between growing a startup and preparing it for an IPO.

He said that current laws and regulations governing private secondary markets are aimed at protecting the public from being duped and defrauded. But if the investors are wealthy, they are considered "well informed" about the risks and therefore no additional regulations protecting the unwary, should be required.

A healthy secondary market might also lead to companies remaining private and avoiding all the expense of going public, such as Sarbanes Oxley and other regulatory compliance costs. These can be a big burden for young companies.

There were several panels on the various issues surrounding these types of deals. Here are some of my notes:

- Steven Bochner, the CEO of Wilson Sonsini Goodrich & Rosati - Silicon Valley's top law firm, talked about the need for some clarity from the SEC on key legal points. He said that the current rules state that buyers of private shares have hold them for at least one year, while SharesPost would clearly like to have a more liquid marketplace. This should be changed.

He also warned of insider trading lawsuits. He cautioned VCs that sit on boards, not to attend board meetings, hear something material, and then trade shares afterwards. He said that there will be insider trading prosecutions in secondary markets, and that plenty of smart people get caught all the time in publicly traded companies. Private companies must adopt insider trading policies now.

Dixon Doll - a former chairman of the National Venture Capital Association and a leading VC, said that secondary markets had brought some relief to the VC community. He said that two years ago, there were many complaints about the lack of liquidity. It can take as long as nine to 10 years for a company to IPO or be acquired when it used to take three to five years.

He said that ten years without any liquidity puts an incredible strain on a company's management and investors.

Ian Sobieski, managing director of Band of Angels, the leading Angel investor group, and an advisor to SharesPost, said that secondary markets had opened up new investment opportunities for Angels. He said he was now able to invest in Facebook, when two years ago his choices were limited to early startups, or public companies.

But he said that it was unlikely that Angel funding for startups would be affected. This is good news because Angels have taken over the early stage investment rounds and have been playing an important role in keeping innovation going in Silicon Valley, making sure that there is a crop of investment opportunities for the larger, later stage VC funds.

- Greg Brogger, chairman and president of SharesPost, said that the trading platform was designed from the start, to avoid any potential issues with regulators, and that lawyers from Wilson Sonsini had looked at every detail.

He added that SharesPost is being proactive and had asked the SEC for clarity on some key issues.

- Scott Painter, CEO of TrueCar, said that he had chosen a lifestyle as a startup CEO and that he was always sacrificing salary for equity. Over the long run, secondary markets save money for startups because they can't afford to pay him what he would earn at a public company.

He made an excellent point in noting that a startup needed different types of investors at different stages of its growth. If a board has investors that want earlier liquidity, that can result in misaligned interests.

Lise Buyer, principal at Class V Group, is a real firecracker. She disagreed with the oft repeated woe at the conference, that we used to have so many more IPOs compared with acquisitions, and now IPOs are just 10 percent compared with 90 percent acquisitions.

She pointed out that more than 40 percent of tech IPOs during the bubble period "blew up," the companies quickly lost value and never regained their IPO price. They weren't ready for an IPO.

Mary Miller, Assistant Secretary at the Dept. of the Treasury, said that the government is interested in secondary markets. She said that there has been a recovery in financial markets but not in the economy, and that's a key concern.

She said that the Treasury Dept. is keen on investigating what's going on in secondary markets and to see how that can help boost the economy. She disagreed with a comment that her department moves slowly, saying that it was moving very quickly in key areas.

Karey Barker, Managing Director at Wasatch Cross Creek Capital, said that allowing institutional investors to buy private shares can help a company IPO, because it can remove the large overhang of stock and its effect on price that's always present with founder's stock.

There's a lockup period where company founders have to wait six months after an IPO. With a big chunk of stock waiting to hit the market, it can depress the share price, and discourage public investors until the overhang is cleared.

Here are some other points that were discussed over the course of the afternoon:

- The 500 shareholder limit in private companies should be changed. Under current rules a company with 500 or more shareholders must publicly report its financial statements. Mr Bochner from Wilson Sonsini, said that founders and employees shouldn't be counted in the 500 shareholder rule.

- There was discussion about valuation and tax and accounting issues. Does the valuation of a company through trading activity on SharesPost affect the official valuation by the accountants, which is used to price stock options and is supposed to be good for one year?

- Just because an individual investor is rich and accredited, doesn't mean that they are savvy. There are many different classes of private shares, with different rights and restrictions, yet some investors don't understand the difference and are just keen to own a hot stock.

- Discounts to valuation. Secondary markets provide liquidity, but they aren't very liquid compared with public stock markets. Sellers have fewer buyers and that means they often sell at a discount, which can range from 15 percent to 40 percent or more. There is not yet enough history on transactions to determine appropriate discount rates.

- So far, the valuation of private companies has been going up, there's been about $50 billion increase in the combined value of the hottest private companies over the past year: Facebook, Zynga, Twitter, LinkedIn.

- What will happen when traders in private shares start to lose money? That could attract new regulations and possibly restrict the access to liquidity that SharesPost, and other secondary private markets provide.

- The secondary market is putting money back to work and that's helping innovation in Silicon Valley.

It's a fascinating topic and we will certainly hear more about the many issues involved. And there will be lots of money made in these private stock exchanges. The best example is Yuri Milner, the Russian investor who has been buying large amounts of shares in Facebook and other hot companies, over the past two years.

Mr Milner was privately derided as being a naive, "hick" investor on Sand Hill Road, because he was prepared to pay large premiums for Facebook shares. However, he has proved himself to be extremely savvy. He's made more than $4 billion from his deals and recently bought Silicon Valley's most expensive home for $100 million. And with no set plans to live there.

That's a middle finger salute to Silicon Valley's "smart money" VC community.

---

About SharesPost

This is how Yuri Milner has already made billions from the new bubble... | ZDNet

Yuri Milner House: Russian Billionaire Buys Most Expensive US Home Ever

NYC Venture Capitalist Fred Wilson Is Rich and Grumpy | Adweek

It's not a bad profile, I learned some things I didn't know. But Mr Wilson declined to participate in the article, instead, he wanted AdWeek to write a profile on one of his startups.

AdWeek declined.

It's a strange situation because Mr Wilson is not a shy person. He regularly publishes on his blog AVC: Musings of a VC in NYC and also includes personal details about his family and his musical tastes. That's not the behavior of someone that shuns attention.

Yet when AdWeek came calling, he didn't want anything to do with the article and prohibited his colleagues from talking with the magazine.

It's understandable that AdWeek would be interested in profiling Mr Wilson because he is a very successful VC who is also outside Silicon Valley -- something that's exceedingly rare.

Also, he is a very visible spokesperson for the revival of New York's tech community. And there are lots of great things to say about the New York startup scene that AdWeek's readers probably don't know about because they don't read his blog.

It all seems a fairly innocent desire by AdWeek to profile an increasingly important person, who is involved in some high profile companies that have clear relevance to AdWeek readers. Yet Mr Wilson's response is to cry foul, as if he is being unfairly treated. It doesn't add up.

His refusal to talk with AdWeek forced the magazine to research the article from other sources, which means the quality of the piece suffered. If the prime source, i.e., Mr Wilson, had agreed to be interviewed then the article would have been measurably improved and he would have been able to correct any potential errors, misconceptions, etc.

I remember a few years back when Hewlett-Packard refused to speak to some journalists because the company did not like to be questioned on some sensitive subjects. The move backfired because HP was unable to respond to direct questions and then had to deal with the fall out when reporters published stories it didn't like.

As Richard Edelman, from Edelman PR, once told me, it's always better to "get them into the tent." It's always best to have a dialogue and build a relationship with a reporter than to fob them off and tell them they should instead be writing a story that you want written. You might then get the story you want written.

Looking at his previous articles at AdWeek, Dylan Byers seems to be a good journalist. He's young, his bio states:

He previously worked as an editorial intern at Roubini Global Economics and from 2009 to 2010 served as an editorial intern at Lapham's Quarterly. From 2006 to 2007 he was the editorial intern at The New Yorker.

I can certainly understand that Mr Wilson might feel slighted that a recent intern was assigned the task of writing his profile. His is an interesting story, and surely deserving the attention of a senior editor at AdWeek, and which probably would have elicited a far warmer response from Mr Wilson.

By the way, the comments section of the AdWeek story is worth reading. It's a great opportunity to brown nose Mr Wilson, (especially if you might be looking for some startup capital).

But it all smells a bit fishy to me and it makes me wonder what else might be going on with Mr Wilson, and at his firm Union Ventures. It's probably a story worth digging into...

Please take a look at the article, it's currently the most popular one on AdWeek. And Dylan Byers looks like a very promising young journalist.

Valuations for venture backed companies are certainly higher than they've been in a long time but are we in a bubble?

The answer seems to be no. At least, not yet.

Yesterday I spoke with veteran VC Bill Davidow:

"When I look at companies such as Facebook, Zynga etc, I see high valuations but at least these companies have business models with proven revenues. Whether they can keep up their growth rate is another question. But these are not the same type of companies that we had in the dotcom boom where investments were made in companies that had no revenues. It feels very different to 2000."

Over on VentureBeat, Riley McDermind spoke with Phil Black, co-founder of True Ventures VC firm:

"We need to worry about a bubble when there are businesses being valued at sky high prices with no underlying fundamentals," he said. "Currently, any type of sky-high, bubble valuation dynamic is the exception and not the rule in the venture market."

At Y Combinator Paul Graham, a veteran investor in early-stage companies, says there is no bubble.

"What's happening now is a lot more localized. A few professional investors are paying higher valuations for startups than they were a few years ago. But the number of participants and the amounts of money moving around are both very small compared to the 90s." ... In the 90s, it was the dumb leading the dumb...

I went to see PayPal alumni Peter Theil and Max Levchin speak recently, both are very active investors. Both agreed that were was no bubble in tech.

Peter Thiel: There is no bubble in tech. This is not like 1999. But valuations are all over the map.

Olivia Oran on TheStreet.com yesterday wrote an article headlined: "Tech Market: Frothy, but no Bubble."

"Whether or not you believe it's excessive to price Facebook at $65 billion or Groupon at $6 billion, there are trends and revenues to price those valuations," said Jeff Clavier, a prominent Silicon Valley angel investor and managing partner at SoftTech VC.

However, Therese Poletti, over at MarketWatch did find Kathy Smith, principal at Renaissance, in an article on 2011 Tech IPOs:

"It's not a bubble," Smith said of tech IPOs. "Where the bubble is happening is in Silicon Valley in pre-IPO valuations."

Foremski's Take: I agree that there is no bubble. At least not yet. But our understanding of a bubble is very extreme. In Silicon Valley, a bubble is only a bubble when large numbers of investors are funding companies with little or no revenues. That's clearly not the case.

High valuations set high expectations and the investment risk is far higher than a year or two ago. And there is lots of money around looking for high returns. The valuations in the top tier of pre-IPO companies show no signs of slowing and that could hurt the return of a strong tech IPO market.

Silicon Valley needs good exits to pump money back into the system and nurture the next generation of startups. With high valuations, the IPOs of companies such as Facebook, Zynga, Twitter, etc, could fall flat because all of the upside has been locked in by earlier investors. That could hurt the prospects for other tech IPOs.

While the top-tier venture backed companies such as Facebook, Groupon, Zynga, etc all have very strong revenues, most in the billions of dollars, there is one standout that has relatively tiny revenues ($45 million estimate for 2010) and a sky high $4.2 billion valuation, that's 100 times revenue.

Will Twitter become the poster child of the next bubble? The Wall Street Journal thinks so, calling it a "tech bubble barometer." (Via Andy Beal.)

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Here is fun video "Here Comes Another Bubble" by The Richter Scales:

Here is a Pearltree on the Silicon Valley Bubble.

I took the opportunity of asking Mr Davidow about the state of Silicon Valley and questions such as "are we in a bubble?"

Mr Davidow is 75 years old and he is the founder of one of Silicon Valley's oldest and most respected VC firms, Mohr Davidow Ventures, which specializes in early-stage investments.

Mr Davidow disagrees with many Silicon Valley watchers that see a bubble emerging and that we may be repeating the mistakes of the dotcom boom.

"When I look at companies such as Facebook, Zynga etc, I see high valuations but at least these companies have business models with proven revenues. Whether they can keep up their growth rate is another question. But these are not the same type of companies that we had in the dotcom boom where investments were made in companies that had no revenues. It feels very different to 2000."

He says that much of the VC industry has moved into mezzanine funding and so the rise of the Angels fills the gap in early stage investing -- which is Mohr Davidows' expertise.

He says that investing in early stage companies requires a lot more discipline these days and that you have to walk away from some deals. With a lot more money coming into early stage companies this raises valuations and risk.

Mr Davidow said that since 2000 and the excesses of the dotcom boom, he has stepped back from his involvement in the VC industry to spend more time on philanthropy and family. He still makes a few private investments -- in a social gaming company, in a radical new hearing aid, and in a green agricultural venture. He sits on the board of one company and he still comes into the office.

He is still bullish on Silicon Valley.

"One of my friends many years ago complained that there were few good investments to be made and that all the 'elephants' had been shot. But then came Oracle, Yahoo, Google, Facebook ... we keep finding new elephants."

He says that Silicon Valley has one of the most diverse economies he has ever seen and that this diversity will protect it.

"But history shows that at some point your luck runs out."

Mr Thiel and Mr Levchin are two prominent members of what some call the "PayPal Mafia." This is a large number of unbelievably successful entrepreneurs; the Paypal alumni have gone on to help found an extraordinary number of successful startups.

The first time I met Messrs Thiel and Levchin I was working at the Financial Times, not long before the PayPal IPO. The IPO was successful and soon after, Ebay bought the company for $1.5 billion.

A big chunk of that Ebay money went back into the Silicon Valley economy, funding dozens of startups, such as Facebook, Twitter, LinkedIn, Tesla, etc.

Later at SVW I would meet regularly with Mr Levchin as he showed me the first version of Slide - a simple photo slide web service (sold six months ago to Google for $200m) and Yelp, the successful global restaurant review site.

The pair were slightly bashful Wednesday evening in San Francisco, sitting under bright lights as Brad Stone from BusinessWeek ran through a list of questions.

Here are some of my notes from the evening:

On valuations:

ML: Groupon is probably under-valued. The fastest growing company ever. I came across a startup recently that had a Powerpoint and no engineers, no product and it had a $16 million valuation. That's an over-valued company.

PT: There is no bubble in tech. This is not like 1999. But valuations are all over the map.

On DST giving $150K to each Y Combinator startup:

ML: It's using Y Combinator as an Index Fund. It's not true anymore that YC has small companies. But it shuts out some of the more value conscious angel investors.

PT: It's a brilliant move. Some of those companies will become very valuable.

On Silicon Valley innovation:

PT: There is not enough happening to take us to the next level. There is an extreme disconnect. Outside Silicon Valley, California is nearly bankrupt. Need to do more.

ML: There is no insane abandon. When I was growing up, the space race galvanized an entire generation, my parents' generation. There is nothing similar. Today, the news was dominated by reports of an iPad 2 screen, it's not that radical. It takes a JFK to motivate a new generation to create the rhetoric. No one in government is doing that.

PT: Everything is short-term focused no one is looking into the future, 15 to 20 years like they used to in our parents' generation. A lot of what our parents generation did: building interstate highways, Manhattan Project, etc, could not be done today.

On efforts to set up "sea states" new sea borne nations:

PT: It's a project that we helped fund to encourage discussion and we are looking at business plans n this area.

ML: It's not for me, I get sea sick very easily.

On waiting to go public:

PT: It is good to wait. Google set the precedent. If it had gone public earlier, Microsoft, Yahoo, AOL would have probably been able to figure out how to compete with Google. That's why Facebook is waiting (he sits on Facebook board).

The Goldman story and reaction was probably part of the general anti-Wall Street saga and not much to do with the Facebook investment.

ML: We went public (PayPal) just before Sarbanes-Oxely and it was very onerous. I slept at the printers for several days with lawyers kicking me awake to ask about patent issues. Once you go public it is a big distraction to staff, they are checking their stock price all the time. If it is down, they are depressed and when it is up, nothing can touch you.

When you go public your organization is probably working at half productivity. Going public slows you down, you should make sure you get most of your innovation done first. You should make sure, as Meg Whitman once said, that monkeys can run the train, then it doesn't matter that your productivity is down.

On what did Google get for $200 million buying Slide:

ML: They got people, ideas and a lot more. I'm sure they at least got their monies worth. I can't say what I'm working on. One thing I've learned in 6 months at Google is that it is good at keeping secrets.

On Facebook versus Google:

PT: Google is focused on people and not products. It wants the smartest people and that's the competition with Facebook. When the top engineers started joining Google instead of Microsoft that was bad for Microsoft.

On inovation:

ML: There is not enough radical innovation in Silicon Valley. Focus is too narrow. Too many companies that are featurettes.

PT: For investment, we look for a powerful narrative and people looking to change the world. That's very rare. How will you recruit that 30th or 40th employee? What will motivate them to join the company? We need breakthrough tech.

On payment systems:

ML: There are lots of opportunities in the cracks where PayPal isn't, lots of new features are needed.

PT: I'm glad I didn't know about payment systems before PayPal. It's very hard, it's a chicken and egg situation, payments are a networked product. How do you get started?

On investment opportunities:

PT: I don't believe in the wisdom of crowds, it's over rated. I don't see too much ground breaking tech coming out of China, there are too many other ways to make money there, and things to be done first, such as MacDonald franchises.

ML: I invest in areas that I know and in countries where there is a rule of law. I've invested in the Ukraine but have lost money so far.

What is your idea to change the world?

PT: We need breakthrough technologies in many areas, applying computer technologies to biotech, agriculture, etc.

ML: We should be willing to take more risks as a society, such as develop safer nuclear energy and also develop better healthcare, fix our bodies.

Afterwards, the two spent a fair amount of time answering questions from the audience and many were looking for investments.

I'd love to know why the "PayPal Mafia" have been so successful. After all, there are plenty of other successful alumni around but none that can be so closely identified in such a large group.

Here is a partial list of the PayPal alumni and some of their achievements:

- Reid Hoffman, founder of LinkedIn and a very successful angel investor: Facebook, Ironport, Digg, Flickr, Ping.fm, Last.fm, Zynga.

- Peter Thiel and his hedge fund Clarium Capital. Not all of his bets have paid off but he is investing and funding some interesting organizations.

- Elon Musk - Head rocket designer at SpaceX and CEO of Tesla.

- Steve Chen - Youtube co-founder.

- Chad Hurley - Youtube co-founder.

- Premal Shah - founding president of Kiva.org.

- Jeremy Stoppelman - co-founder and CEO of Yelp.

- And there are plenty more in this group: Dave McClure, Jared Kopf, Eric Jackson, Kieth Rabois, Ken Howery...

Here is a Pearltree on the PayPal alumni:

PayPal Alumni

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Please see:

Yammer Founder On PayPal: Understanding The Power Of Virality... - SVW

Paypal's Max Levchin: The Rise Of The Angels . . . And The Fall In Innovation - SVW

The Stunning Achievements Of PayPal Alumni... - SVW

I believe no General Partner at any Venture Capital (VC) firm I know intentionally sets out to destroy innovation, yet the destruction of innovation is the outcome of the economic model under which Venture operates today. Let me elaborate.

Proof is in the pudding

First, without regard to economic models, Venture with its highly intertwined and syndicated ecosystem has produced negative 4.2% ten year returns for Limited Partners (the investors in Venture Capital firms). With only 35 of 790 (or so) VC firms making any consistent money for Limited Partners (according to a prominent Silicon Valley money-manager) more than 95% of VC firms are therefor posers who deploy the incorrect arbitrage to what constitutes innovation and what produces (any kind of) value. As such the compass of most VCs in Silicon Valley has proven to be incorrect and attracts hordes of wannabe entrepreneurs who eagerly submit to their false pretenses in order to raise money for their fashionable startups.

So, whether you believe in my analysis of the economic model that lies at the foundation of this problem is irrelevant. Whatever the model, the evidence clearly demonstrates Silicon Valley's self-made version of the Venture Capital model does not work (save for a few firms with investment networks so entrenched, large, diversified and greased with newly introduced evergreen horizons offering many opportunities to hide).

Venture Capital itself is responsible for the massive noise of false-positives that makes many General Partners not see the forest through the trees anymore and forces them to revert back to blaming the government, the economy or anything else they can hang their hat on, dutifully supported by their NVCA lobbying organization.

Negative VC returns severely hurt the reputation of innovation and the opportunities for the next generation.

Second, no cartel scales

While a cartel can prove to be a valuable singular investment opportunity for investors, Limited Partners (such as Institutional Investors) rely on the performance of a sector or asset class to produce consistent out-weighted returns. Limited Partners can therefor not rely on an underlying investment cartel, but need to rely on an economic model that consistently attracts the outliers of innovation and adapts progressively over time.

Hence the impromptu investment cartel deployed by Silicon Valley VCs chasing the same kinds of companies and dominated by syndicates, collusions and complete transactional in-transparency to all of its marketplace participants, is economically incapable of producing meaningful returns for Limited Partners.

The flight response of Limited Partners leaving the asset class as a result of the underperformance of the investment cartel, kills opportunities for the outliers of innovation the cartel is economically equipped to ignore.

improper deployment of risk

One can argue about the validity of the fuzzy Private Placement Memorandums (PPM) of VCs, with many copied directly from the PPM of a prominent VC firm in Silicon Valley (and therefor in direct support of my second argument) that have successfully raised $250M or larger Venture funds. Or the many VC firms with General Partners that lack relevant entrepreneurial experience themselves.

Be that as it may, any deployment of monetary resources that syphons through ten levels of diversification is economically doomed to fail.

Ten levels of diversification of investment risk is how Venture money from Limited Partners through Venture Capital is deployed to a startup, indicating not only an extreme fragmentation of risk and dollars, but a lack of investment discipline and a lack of confidence to the stated investment thesis. That fragmentation of risk has resulted in fragmentation of investment rounds needed to support the runway of a company, so much so that raising money has become a bigger distraction to many startup CEOs than running the business.

Investor owned companies with overpowering board control, disjointed interests and fear driven exit requirements hurt entrepreneurs who strive for the creation of meaningful Social Economic upside.

one can't keep fooling the public

The public plays a crucial role in Venture many VCs have forgotten about. The public is not only an investor (and board member of the investment committee) in many Institutional Investor (and other Limited Partner) vehicles, but is also a buyer/user of early stage technology products and if all goes well, provides the cash infusion for a healthy Initial Public Offering (IPO) of the startup company in the stock market, and thus providing an investment return.

With the public having been fooled in the late 90s by the bursting of an investment bubble in technology companies, their vote of confidence in IPOs with artificial valuations and little Social Economic Value remains justifiably low ten years later.

Today the public still votes with its wallet.

Rather than adapting their pursuit of companies that drive real Social Economic Value, many VCs still passively rely on the acquisition hunger of public companies who in the race for market share dominance, can still be fooled to believe that buy is better than build.

Yet a VC investment thesis that is predicated on predicting the holes in a public company's convoluted business strategy is a dangerous proposition, in which no wisdom prevails. Innovation becomes an utter gamble, rather than an intentional deployment of vision. Good luck getting rich in Vegas.

Kick in the butt

Venture Capital is just as dead as American rapper Nas proclaimed the death of hip-hop with his song in 2006. All that song did, according to rapper and self-madebusiness mogul Jay-Z (Shawn Corey Carter) in a recent double whammy interviewon Charlie Rose and on Oprah's OWN Network, is induce a much needed change in the musical genre. That same change is needed in Venture Capital.

The wide open greenfield opportunity in technology innovation dictates there are many more opportunities to be had, just not driven by a Venture Capital model that is economically unsound.

Entrepreneurs will evolve, the real question is: can Venture Capitalists?

Here are some notes from our conversation:

- I have nothing against the secondary market because it addresses a need for liquidity and markets always create a solution to a problem. But in the case of Facebook I wonder if investors are being adequately disclosed. When you can raise as much as $1.5 billion in the secondary market how is that different from an IPO?

- I think secondary markets play an important role but I'm concerned that excesses in this market will attract regulations that can be over-kill. That's what I'm afraid of, that the regulatory response will be extreme and draconian.

- In our investments we think there is room for teams to take some money out, especially if they have been working together for many years and they need some money for a mortgage or college. But I do wonder if you let people in and out what that does for the cohesion of the team.

- My predictions for 2011 are that we will see a modest improvement in IPOs and also more M&A activity. The rise in IPOs should strengthen M&A valuations.

- Some startups have been selling themselves too early but that's partly because of the liquidity issues and founders have been forced to take what they can get. But as IPOs increase so will startup valuations.

- IT security is key, especially with cloud computing. Security in the cloud will be very important because you don't know where your cycles are. In the old days the cloud was called the mainframe and it sat in a secure facility and you connected through a proprietary network. Today you don't have those same assurances with the cloud.

- Cloud will be big this year and a big buzzword and that worries me because there will likely be too many companies funded that shouldn't be.

- Storage is another hot area simply because of the massive amount of data being created daily and the need to make it available online and searchable.

- Social networks are overdone and over invested. There have been too many companies funded with little differentiation.

- All the fuss over angels and super angels is a tempest in a tea pot. We have seen these cycles in VC many times. There is no difference between traditional VCs and "super angels" -- we have the same goals.

- Long term I worry if the incentives are there for people to spend many years building companies. I worry about the alignment of risk and reward for entrepreneurs.

- I also worry about the US. We have a tax and regulatory environment, combined with poor education, that doesn't make the US a good place for innovation. Innovation will happen but will it happen in the US?

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Please see:

The Lack Of Tech IPOs Is Holding Back Job Expansion Says Leading VC

VCWatch: Code Red In Silicon Valley Says Bob Ackerman - Government Killing Innovation

Mr Tamas was speaking at the Le Web conference in Paris. He said that there are very few Internet companies that have the potential to define their genre and become great companies. Groupon can achieve much more by staying independent.

DST is a Russian-based investment company largely funded by Russian oligarch Alisher Usmanov and run by Yuri Milner.

Earlier this year BusinessWeek reported: A Russian Star Rises in Silicon Valley

Since paying $200 million for 2% of Facebook last May, Milner has increased that stake to nearly 10%--worth perhaps $2 billion--by purchasing shares from early employees...

On Apr. 19, DST took the majority of a $135 million financing round for Groupon, a Chicago-based site offering coupons for restaurants and museums. In December, DST was the biggest investor in a group that plowed $180 million into Zynga.

...Milner has become a major backer of Web 2.0 startups and has another $1 billion to spend on new investments.

Mr Tamas said that DST looks for companies with a valuation of at least $1 billion and it only invests in Internet companies that have the potential to become the most important in their markets.

He declined to discuss the details of Groupon's rejection of Google's offer, reported to be as high as $6 billion but he said that the company's incredible growth in selling "groupons" discount coupons, justified its decision to stay independent.

He said it was rare to find Internet companies of the stature of Groupon. He used the analogy of planets, which shine by reflecting light; and stars, which generate their own light -- Groupon is in the star category.
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Please see: Analysis: Google Buying Groupon Doesn't Make Sense...

For more Le Web news please see this Pearltree: http://pear.ly/A3Iz

Here are some of my notes from the panel:

- Mr Silbert's company runs a secondary market in shares in private companies. The shares are sourced from angel investors, founders, and employees. SecondShare plays an important role in creating liquidity in private companies in the absence of an IPO market.

- It can take up to ten years for a startup to have an exit and that's too long to expect founders and employees to wait.

- Traditionally, VCs have been against founders taking money off the table because they have less "skin in the game" and thus less motivated to create a successful company. But this attitude has changed significantly over the past two years and now it is considered OK for founders to reduce their stake by about 20 per cent.

- Mr Silbert said that public markets are broken and that the IPO has been dying for many years but not many realized it was dead. There used to be 400 to 500 IPOs per year but now there about 100.

- Liquidity for founders when raising successive rounds of capital used to be a rarity -- now it is much more common. It is often discussed and built into the structure of financing rounds.

- Some say the founder is less committed if they reduce their stake but it is exact opposite. Wives wants to see something from their husbands' 15 hour work days.

- - Jeff Clavier has invested in 90 companies over six years. He said that when entrepreneurs become investors there is a tendency to try to run the company rather than let the founders do it. It can take several years to adjust.

- Mr SIlbert sees himself in a war with Wall Street. He is a "recovering" investment banker and now wants to take on and disrupt the investment banks. The vast majority of startups aren't ever going to IPO. Wall Street cannot innovate, it moves too slowly and makes money of off opacity.

- Choosing a VC should be treated like hiring an employee because they sit on your board.

- SecondShare should do $400m this year, it did about $100m last year.

Sarah Lacy reports:

Chegg's CEO Dan Rosensweig was one of many pinging Meeker with congratulatory notes this morning during my call with Meeker, Doerr and fellow KP partner Ted Schlein. He described it as "huge news" and a "big coup" for Kleiner.

"Mary's ability to spot the most important trends, evaluate-and-back the most effective entrepreneurs, predict the major pivots in the industry, and do it on a global basis has been unparalleled," he told TechCrunch via email.

While this is likely a lucrative move for Ms Meeker this is not good news for the return of the IPO market. The valuable role that Ms Meeker played in her "ability to spot the most important trends, evaluate-and-back the most effective entrepreneurs, predict the major pivots in the industry, and do it on a global basis" used to benefit the investors in public companies.

Now that benefit will go to a select group of elite investors in private companies.

However, if the IPO market is to return, and in turn, help fuel reinvestment in Silicon Valley startups by VCs such as Kleiner, Wall Street needs more Mary Meekers -- not fewer. One of the biggest problems public companies have is in having enough analysts following them and writing insightful investment reports.

Even large public companies such as Intel have problems in attracting enough analysts that understand their business. Newly public companies face an uphill battle in attracting analysts that know them and their markets. With the carnage among Wall Street analysts following the financial meltdown two years ago, the need for good analysts is even more acute today.

Kleiner could be shooting itself in the foot. The firm needs people like Ms Meeker on Wall Street talking about its public or soon-to-be-public companies, and helping to create the markets for that stock.

It's superstar analysts such as Ms Meeker that create the trading markets for public companies.

The goal is to provide investment and mentoring services to startups from angels that have a lot of experience in building successful web companies.

Thomas Korte, ex-Google, one of the founders of AngelPad introduced the companies, all of them run by engineers from some of Silicon Valley's top companies, such as Yahoo, LinkedIn, Facebook, etc.

There was a great turnout from potential investors with standing room only.

MoPub: A new ad network from former AdMob and Google engineers focused on optimizing mobile ads. All the right buzz words but it wasn't clear what it did. It just finished raising a round of funding.

RollCall: It lets groups of people decide where to go to the movies or anywhere else, using their smart phones. How long before Facebook or Twitter adds such a capability? It has finished raising its first round.

Curated.by: Organizing Twitter content by topic rather than hashtags, which "don't work." Sounds like a useful feature but is it a business?

AllTrails: A Yelp for hikers. Sounds like a useful service. Outdoor activities market is massive. The team is also working on an "AllSnow" site.

EggCartel: A type of Craigslist that lets you easily sell anything by taking a photo and posting it to your social networks. Looks useful and easy to use.

Adku: Analyzing large data sets to optimize e-commerce. Lots of the right buzz words in the right order.

HugEnergy: Track your energy usage in real time and learn how to save energy. Surely, you'll save 95% of the energy you can save, pretty quickly and then what? Warm and fuzzy.

Snip.ly: This was the most intriguing of the bunch. It analyses the most informative snippets of content on a page and then uses a recommendation engine to surface and share the "best snips." It is like PageRank for each page.

Mr Levchin recently sold Slide to Google and he is an investor in Yelp and several other startups. And he is still young and has a lot more to add to his wikipedia page before he is done.

Mr Levchin writes on his blog, but only very occasionally. One such occasion was fairly recently, his first since mid-2008, a critique of Silicon Valley's angel community.

Angels have done very well for themselves over the past few years and this includes many of his former Paypal colleagues.

In his latest post: On ambition « You've gotta be kidding me he writes that the Angel method of investing in startups is considered a better method, "an antidote" to traditional VC investing.

Silicon Valley Angels have done well by choosing companies that can exit (sell themselves) fairly quickly, at fairly low values, $10 million to $20 million. While this approach makes money for the angels and their investments, it tends to discourage building breakthrough companies.

Angels advise startups to take smaller and earlier exits, which minimizes Angel risk but does little to develop startups with big dreams.

It's an astute observation and it is something that I've been thinking about over the past couple of years. I meet with a lot of startups and I remember meeting with Mr Levchin when I was at the Financial Times, and he was at Paypal; and hearing about Paypal's ambitions. Similarly with the founders of Yahoo, Salesforce, Google, Facebook and other groundbreaking companies.

Today, it is rare to find startups that think beyond being lucky to survive two years and be sold.

Yet even a few years ago we did have startups with grand designs. For example, I was an early admirer of Ribbit, a plucky startup that had the potential to disrupt the Telco industry.

Yet in mid-2008 it agreed to be bought by BT, the British Telecom giant. I was very disappointed: Are we seeing a disturbing trend in "blackmail" innovation...? | ZDNet

Since that acquisition Ribbit has launched a cool iPhone app but not much else. It has been dead quiet under the ownership of BT -- yet at one time this was an ambitious team taking on the world.

Mr Levchin sees the rise of the Angel and "Super Angel" investors as the key factor in the lack of "significant innovation" today.

At the moment, what amounts to lack of visible significant innovation seems to correlate with abundance of angel-funded startups shooting to get picked up for a fistful of dollars.

We should aim higher.

I agree.

It's easy to understand why Mr Levchin takes this position. He and his team built Paypal into a formidable company that eBay was happy to acquire for $1.5 billion. That's a hundred times more money than the $10 million to $20 million exit rounds of Angel investors.

Because Angel investors are investing smaller sums of money there is little incentive for them to take larger risks. However, traditional VC firms will invest at higher valuations and therefore will be less willing to sell for a "fistful of dollars."

The VC firms require a larger exit, and that's why they set a greater goal for their startups: to own markets of $1 billion and more -- this creates startups with far higher expectations. And that's what Silicon Valley needs if it is to produce the next Paypal, Google, Salesforce...

Mr Levchin makes an important point in correlating the rise of the Angel investors, with the fall in innovative startups.

What is wrong with Venture (not innovation) | The Venture Company.

The recently spawned statistical hindsight by reporting firms covering Venture returns post 9/11 has suddenly produced a new crop of followers to criticize Venture, with one problem. Hindsight does not produce foresight, and leaves many looking for short-term trailing micro-indicators rather than macro-economic compatibility and rudimentary principles of risk.

...Now, some suggest that the solution to Venture is to simply hang in, or use escapism in one of its many flavors to either constrict its workings further, lower risk even more, adjust management fees or exit out of Venture altogether.

The bottom feeders of the ecosystem fed by the attention from zealous media reporting (that still confuses stage with risk), popularize the oxymoron of Angel and micro-VC investing that yield even less scalable and smaller absolute returns than VC, and employs even more deflated risk profiles and a debilitating outcome to the production of Social Economic Value public markets care about.

The problem with Venture is that it is broken on many fronts, all of which are responsible for the improper deployment of risk. Let's list a few important ones:

- Endless diversification

Most Limited Partners I speak with are completely unaware of the deployment of no less than thirteen (13!) levels of bottom-heavy diversification of risk in Venture with the money they ultimately make available to entrepreneurs.

Think of it in simple terms: if I were to tell you that there are thirteen roads to drive to the beach, some or all intersecting with each other at one point, which one would you take at what point in time, and what town would you end up in?

Go ahead and read the private placement memorandums from Venture Capital firms like I have, and you will notice how Limited Partners in Venture have overwhelmingly invested in a thesis that does not list a critical path, but merely state a desire to end up on a beach.

Multi-level bottom-heavy diversification in any financial system serves as the ultimate detection that the original asset holder is being taken for a ride. And Limited Partners have been taken for ride, not just because they themselves deployed insufficient investment discipline.

- Endless Fragmentation

In order to make their entry in Venture worthwhile against the other asset classes Institutional Limited Partners invest in, no less than $1B needs to be put to work. Both Limited Partners and entrepreneurs (the asset holders) are taught to believe by Venture Capitalists (the derivative) that small is beautiful, blissfully ignoring the outcome of the false promise of their definition of capital efficiency and extreme fragmentation of dollars and risk. So much so that Venture Capital has turned into micro-private equity (or what we coin subprime VC).

So, in the end Limited Partners who thought they invested in Venture Capital have instead invested in (micro) private equity with the (micro) private equity returns as a result. Venture Capital the way it is deployed today yields incompatible risk/return ratios.

- Defunct innovation arbitrage

Technology does not create markets, it facilitates marketplaces. Technology is merely a distribution mechanism and a piece of the puzzle that enables the electronic facilitation of (in most cases already) existing macro-economic behavior. So, the reason why Venture Capitalists cannot generate significant returns is because their investment thesis centers around the development of technology, and fewer innovations rely solely on technology to become successful.

The investment thesis of Venture Capital from 40 years ago is simply no longer valid and yet the private placement memorandums (PPMs) have not fundamentally changed. Entrepreneurs with a more sustainable and economic approach to innovation are automatically rejected and Venture Capitalists have become stuck in their self-induced subprime maelstrom.

- Improper investment theses

Not just the lack of relevant operating experience lies at the bedrock of improper arbitrage of innovation but more importantly the improper assignment of risk to technology innovation. Unlike many Venture Capitalist may want you to believe, the risk of a technology Venture has nothing to do with the development of technology.

The risk of the Venture is associated with the propensity of the idea to attach to (ideally existing) macro-economic need. Hence the investment thesis in the private placement memorandums of VCs should state their ability and merit to recognize massive market pull, rather than technology push.

As a Venture Capitalist it means you now need to be a (macro) economist, with leadership operational startup experience and a technology background to assess the appropriately assess risk that will yield large Social Economic Value at the right price and time.

- Unnecessary new risk

Collusion and price-setting is not only prevalent with Angels (as Mike Arrington from TechCrunch alleged recently), it has been a daily practice of Venture Capitalists on Sand Hill Road for the last twenty years. While that is not only morally wrong, syndication of deals using those schemes not only violates free-market principles and hurts entrepreneurs, it also focuses rather than diversifies the risk Limited Partners meant to deploy by spreading investments across multiple VC firms.

Venture Capitalist have created new unnecessary risk by getting away with a soft and improper investment thesis in the PPM, and the deployment of an impromptu investment cartel (I can write a book about what I have witnessed here) for every deal they encounter, knowing full well that entrepreneurs have no other way than to obey to the cartel as their only path of securing a funding runway consisting of several rounds of spoon fed investments, or else be deemed and echoed in the Valley as "impossible to work with".

Because of the systemic dysfunction mentioned above Venture cannot and will not automatically recover. The improper deployment of risk can never make up for the passing of time, or the miraculous recovery of public markets, or the perpetuation of fear which increases protection of downside.

Venture can make an instantaneous recovery when it is reinvented (we have), from top-to-bottom, so its foundational principles are in line with the free-market principles we boast about so often but we implement so poorly.

The reason why we have not performed in Venture is because we lie to ourselves, and those lies only serve the derivative in Venture well. But unless we meet the needs of the real asset holders in Venture, Limited Partners with money and entrepreneurs with ideas, nothing will change for the better.

Are you with me?

By Georges van Hoegaerden, Managing Director, The Venture Company

I was reminded again by how dumb capital has destroyed innovation by listening to Paul Kedrosky's interview with TechCrunch, in which he concludes that The Kauffman Foundation (which Paul represents as a Senior Fellow) may get out of Venture Capital altogether and deploy some of its monetary assets elsewhere.

Not an unexpected move, as I predicted a while ago many Limited Partners (LPs) as investors in Venture Capital (firms) would make, but a somewhat presumptuous conclusion from a respectable foundation that is supposed to be at the foreground and chartered to support the proliferation of innovation. Foolishly, I expected more intelligence from an entrepreneurial foundation than the intelligence displayed by a run of the mill pension fund stuck in a product of their own making.

Nevertheless I applaud the move based on how Paul described the foundation reached that impending conclusion. For we need to rid Venture Capital (VC) of Limited Partners who do not understand the foundational principles of innovation the sector depends on, and who do not understand the deployment of its unique risks. Probably for the same reasons why Michael Moritz of Sequoia Capital twenty years ago did not want to see pension funds enter the Venture Capital fray.

Take responsibility for you own actions (and in-actions)

First off, the reason why Venture has not and unchanged will not perform (at scale) is because of the financial system Limited Partners in Venture Capital have deployed, one that allows Venture Capital firms to take it for an all too comfortable ride.

With multi-tier bottom-level diversification (as described in 2010: The State of Venture Capital), a grab bag of other alternative investment options and ten additional levels of diversification once a VC firm is ready to invest, it should be no surprise that Venture Capital overloaded with derivatives and diversification has lost the merit it was once founded on.

We can now all easily blame 95% of the VC firms who do not produce any consistent returns for their Limited Partners, or Limited Partners can ask themselves the question why they created and participated in a financial system that enables such systemic underperformance.

We, as financiers of innovation need to take the responsibility of how we enabled a flawed governance of innovation.

Mired in "downstream thinking"

But our observations about Kauffman are based on the activities deployed by them over the recent years. The interview with Paul, the types of programs they support and a recent interview of Carl Schramm, Kauffman's current CEO with Charlie Rose all confirm who they have become. The beachhead for downstream thinking.

The entrepreneurial foundation, driven by the principles and money from a magnificent entrepreneur, seems to have made the mistake of confusing deep consensus driven hindsight with the proper definition of innovation; groundbreaking yet unrecognized foresight.

Perhaps not surprisingly since many of the key figures in Kauffman are economists who could not predict the demise of venture capital until it hit them in the face, and consequently have no idea as to how to fix it - as deep hindsight rarely translates into meaningful foresight. Hindsight and foresight are polar opposites.

Rather than to accept the outcome in Venture as a fait accompli, only a real entrepreneurial foundation would start to wonder what needs to be done to tap into the incredible entrepreneurial capacity in this country and model its financial constructs accordingly. Apparently not the Kauffman foundation.

Financial incompetence chokes our country

Now in the grand schema of things Kauffman is a drop in the Venture bucket, with a potentially side effect of dragging down other Limited Partners in Venture who are similarly clueless about how to reinvigorate the arbitrage of innovation. Such an atrophy of Limited Partners is actually a good thing (as it washes out those without proper investment discipline) as long as it is promptly replaced with new Limited Partners who have a more astute and disciplined interest in Venture aligned with the massive greenfield that lies ahead in technology innovation.

Problem is that beyond the danger that Venture as a scalable asset class could unjustly disappear, the malaise of the financial system in Venture may leave a large stain on the potential of the underlying asset, innovation. Already innovation in the U.S. has suffered from twenty years of subprime VC investing that by design can never scale innovative outlier capacity. The damage we already incur is a significant lack of faith, interest and distrust of technology companies by the public.

Because of the underperformance of the vast majority of Venture Capital firms many financiers now begin to think that the potential for innovation has decreased similarly. And that stain causes further mistrust in the sector, increases fear and catapults whatever is left in Venture even faster down the subprime spiral and our country into the lost leader of innovation.

Subsequently, the demise of VC creates some opportunities for alternative venture strategies, new Angel and micro-VC oxymorons that further perpetuate and fragment subprime investments and on average perform even worse than VC firms. Subprime at its best.

My recommendation to Limited Partners:

• We are at the beginning of the technology evolution. Keep in mind that less than 20% of the world's population has access to meaningful technology innovation to enhance their daily life and improve productivity. A fantastic investment horizon lies ahead and as the youngest asset class in your portfolio, technology Venture has the most attractive economics and if deployed correctly, phenomenal potential for massive returns short term.
  
  
• Venture Capital, the way deployed as a financial instrument today cannot support groundbreaking innovation at scale. Not because of a purported "Voodoo" of technology, but because of the systemic improper deployment of risk. Unchanged Venture Capital will continue to create self-induced risk, and therefor consistently produce deplorable returns for Limited Partners.
  
  
• You can't teach an old dog new tricks, so don't expect better LP returns from the existing crop of VC General Partners. For twenty years Venture Capital has been given virtually unlimited freedom to deploy their optimal investment thesis, with massive market pull and the ability to control all the strings with regard to the governance of innovation. Tightening financial incentives does not magically turn subprime GPs prime and does nothing but dissuade new prime GPs who want to clear the air (the subprime ones will hang on for dear life as long as possible, even if you tinker with their management fees).
  
  
• The deployment of the financial system that drives the deployment of risk in Venture Capital needs to be re-invented (we have). Investing in Venture unchanged is the definition of insanity. The solution is not a deeper understanding of Venture Capital's complexity, but a dramatic simplification and accountability of its foundational principles
  
  
• Stick to your knitting. Get out of Venture if all of this is too much hassle for you. You may miss out on the incredible opportunity that lies ahead in technology Venture but your passive presence in the sector does nothing but perpetuate subprime and hurts the performance of our economy in the long run.

In late June, Linden Lab brought back founder Philip Rosedale as interim CEO, after CEO Mark Kingdon stepped down.

The current value of Linden Lab is estimated by SharesPost to be about $271 million or about $100 million less than a year ago.

The plunge in value appears related to today's news that the company is closing the five year old "Teen Second Life" virtual world at the end of this year.

The company said:

"...supporting and developing for two separate grids has been a challenge for us, and has slowed progress on improvements that benefit all Residents. To help us focus our resources and development on the Main Grid, we have made the difficult decision to close Teen Second Life."

Linden Lab has lowered the age for Second Life membership to 16 years and is evaluating lowering it further to 13 years -- but only if it can develop ways to provide safe access for younger teens.

"Linden Lab has received over $19 million from Mitch Kapor, Catamount Ventures, Benchmark Capital, Ray Ozzie, Omidyar Network, Globespan Capital Partners, and Bezos Expeditions."

SharesPost estimates the value of private firms based on shares bought and sold in private markets.

- Facebook has a value of about $25.5 billion;
- Zynga is valued at $4.9 billion;
- Twitter at $2.2 billion;
- LinkedIn at about $2 billion.

Georges van Hoegaerden was born in The Netherlands and came to Silicon Valley to work at Oracle. He soon jumped head first into the startup life and became a serial entrepreneur. But he quickly became disillusioned with VCs and a VC industry that lacks proper governance and consistent execution. He is passionate about reinventing the entire VC industry.

In this post he warns that Silicon Valley is on the brink of a serious "implosion" because 95% of VC firms are not making money for their investors. Many VCs are risk averse, they don't have the business experience needed for the job, and they are happy living off of generous management fees rather than working hard to build successful startups.

He points out that there are tremendous business opportunities ahead. We are still at the very early stages of a massive technology boom with just 20% of the world's population having access to any meaningful technologies. The VC industry should be expanding rather than contracting.

By Georges van Hoegaerden, Managing Director, The Venture Company

Some people do not understand why I do what I do and why I bother, and underestimate my determination to fix Venture Capital. Certainly there are much easier ways to make money than to pursue the obliteration of an investment cartel, in which seemingly everyone belongs to the club.

...

I came to the U.S. on my own with some hard earned chunk of change in my pocket, invited by Marc Benioff (now Salesforce.com CEO, then Oracle VP) and Larry Ellison (Oracle's CEO) who wondered why I was able to sell their (then) emerging products while they couldn't.

I left Oracle with fond memories as soon as my green-card was approved and jumped in Silicon Valley hoping to find more intelligence there.

My first startup was a group of consultants with a horrible business plan, and I told them about my opinions in a way only I can. Instead of fleeing, they came back and asked for guidance (management incubation). We turned the company into a product company and raised a double digit series-A post 9/11. The company was sold in 2006 for triple digits.

As a board member my encounters with Venture Capitalists quickly made me question their catalytic value. I went on to build a few other successful companies and had a brief part-time stint on the "dark side". A clear pattern of defunct VC governance and execution started to emerge.

...

The startling revelation, as proven out by the empirical evidence I have delivered for quite some time now is that according to a renowned money manager 95% of Venture Capital (VC) firms are not making any consistent money for their investors (Limited Partners).

And that means Silicon Valley is at the brink of a serious implosion.

Imagine what would happen if only about 35 of 790 VC firms were to survive in ten years from now.

Alarm bells should be going off by now, but few appear to be paying attention. Why not, you say?

Well, much of the money pumped into VC firms comes from Institutional Investors (pension funds, endowments, insurance companies etc.) with bulk loads of cash reserves they want to put to work. They dedicate a predetermined amount (usually by board consent), between 10% and 15% of those reserves to alternative investments of which a portion is then allocated to Venture Capital.

To make a long story short, a tiny portion of assets from Limited Partners (even the non-institutional ones) is devoted specifically to Venture and a loss or break-even of less than 5% of total assets does not evoke a lot of emotion. Hence optimization discussions with Limited Partners about Venture turn with the agility of a big freight ship.

The alarm bells are getting muffled even more. Institutional Investors have built majestic constructs supporting the deployment of their Venture Capital assets. Many invest in Venture Capital through fund-of-funds with a "specialization" in alternative assets, a fuzzy term for anything that is not mainstream.

And thus the actual performance of Venture is hidden behind the performance of the grab-bag of other financial instruments that resides in those fund-of-funds.

And it gets worse. VC firms themselves have been allowed to diversify their risk by embedding alternative investment strategies within the firm, and in worst cases even within the same fund.

In short, Institutional Investors have stacked derivative, upon derivative, upon derivative (with of course zero marketplace transparency) and appear surprised performance of Venture Capital has lost the fantastic upside that made them all want to get in some 20 years ago.

And the mess does not end there.

The mushy multi-tier asset allocation constructs allowed many General Partners entry to the Venture Capital business who have no credentials of being there. Their lack of experience and foresight has turned into fear and with it the implementation of Venture Capital risk has turned predominantly subprime.

As a result Venture Capital risk has produced over the last ten years no more than micro Private Equity returns (less than 10% IRR), squandered about $1.7 Trillion in funds and eroded public trust in companies that never had any social economic value to begin with.

That fear from inexperienced General Partners in VC firms further exhibits itself by the deployment of 10 levels of diversification of risk when a VC firm makes an investment into a startup. Extreme fragmentation of assets and risk protects VC downside (making good money off management fees for 12 years) more than it protects upside, and thus Limited Partners are poised to lose out again, regardless of the economic circumstances.

Limited partners deserting venture

Improper deployment of risk cannot be mitigated by economic recovery. Venture needs a reinvention from the top. But who cares?

Everyone in or around Venture should. The worst thing that can happen to a sector is that investors stop caring, and many have. Many Limited Partners will not renew their commitments and simply get out, and allocate their 5% of Venture Capital elsewhere.

A speaker at a recent conference claimed the demise in VC firms to be as large as 30% over the last 10 years, with as much as 50% of venture folks already affected. New Limited Partners to the sector I speak with simply see no reason for getting in, given its deplorable performance.

And Venture Capitalists don't seem to care too much because ten years of a cushy management fee from a sizable fund -- with no way for the public to establish their merit -- gets them setup for life quite comfortably.

Under the cloud of economic insecurity and with micro private equity returns in hand, it is still easier to raise another fund (and thus another ten years of fees) than to admit that not the economy is at fault, but their deployment of risk in it.

Idiot Limited Partners

Many idiot Limited Partners have fallen for their arguments again and Venture continues to spiral further down the slippery subprime slope it has been on for a while. To VC, survival of the fittest has turned into survival of the shrewdest. Or as a General Partner from Sequoia Capital allegedly stated: "We used to have a club, now we just club each other".

But the real impact of all this ignorance has already affected entrepreneurialism. Defunct VC governance has led to a dumbed down investment thesis that will only attract entrepreneurs that submit to that thesis. Hence the quality of innovation that surfaces is limited by the quality of the thesis that is projected.

Subprime entrepreneurs, willing to be enslaved by subprime VC governance continue to tear down the potential of social economic value groundbreaking innovation is supposed to ignite.

Today, glorified programmers and VCs are the inexperienced partners in a dance that only a small audience (not the public) wants to attend.

Huge opportunities ahead

With 80% of the world's population still not having access to meaningful technology applications, the opportunity to spawn new groundbreaking innovations remains enormous.

Technology adoption keeps growing, even when Venture Capital declines in its ability to govern worthy innovation. So, the opportunity dictates that there is much more room for Venture Capital firms to grow, just not for ones that cannot establish a proper investment thesis of innovation.

There is no valid reason why 100 VC firms with a single $100M fund cannot generate a six times return each, except for the improper deployment of risk. Certainly the gaping opportunity in technology dictates that there is also no reason why the total number of Venture firms in the U.S. could not reach 1,000.

The grim impact of doing nothing

The most powerful assets in the Venture ecosystem (see our Venture Primer) are the many entrepreneurs with groundbreaking ideas we have bred in this country. Yet, those outliers of innovation have systemically been ignored by a dumb financial system that favors those willing to be enslaved by subprime risk.

Groundbreaking entrepreneurs have already left the party and quickly become extinct. Lured by lucrative offers they chose to find solace with better custodians of innovation, larger yet agile companies that simply took better care. Many returned home to their country of origin with an Ivy League diploma in their pockets. Silicon Valley, for what it once represented, has begun to implode.

With more than 50% of moneys spent in certain areas of Silicon Valley dedicated to startups, a 90% erosion of that money (from cutting down the systemic underperformance of 95% of VC firms and retrenching of disappointed Limited Parters) leads to an estimated 45% decline in overall jobs.

That in turn creates massive economic deflation to the region and exemplifies why governmental intervention without fundamental reform (the current band-aids will be circumvented quickly) of financial systems in Venture does nothing to prevent the slide it is on.

Our local and federal governments should be all over this case, to prevent a further systemic slide that could turn California into a grave-yard for what has been, and our country from becoming the lost leader of innovation.

Our government has simply not connected the dots between systemic failure in Venture and systemic failures in the economy, just yet. The pain and destruction probably has to become more obvious first.

Outdated financial system

U.S. Commerce Secretary Gary Locke did the usual politically correct thing by inviting members to his National Advisory Council on Innovation and Entrepreneurship with large statures in the old system, yet none in the new. The outcome of that exercise will be as expected, more of the same (yet no one will be able to politically accuse him).

Groundbreaking innovation always comes from the outside, never from the people within. That applies to the innovation of our financial systems in Venture too.

As a reader of my blog, you may not be surprised to learn that the problems in Venture have nothing to do with some deep rooted and mysterious "Voodoo" of technology or innovation. We have an outdated financial system that does not need more regulations of its complexity, but a dramatic simplification and flattening of its marketplace behavior.

The Venture business is the poster child for creating such a new financial system, as its current performance can nothing but improved on.

Innovation can only be saved by a financial system that is truly a free-market system, away from the existing cartel that offers no marketplace (transactional) transparency, and is void of real competition that lies at the capitalistic fundamentals this country was founded on.

So, my self-imposed journey to save America from itself continues, for I have seen its potential.

We can save the fantastic innovative capacity in this country and elsewhere, when we apply the same intelligence of the way entrepreneurs build innovation to the way we fund it.

Without a new free-market financial system in Venture, be sure to strap in for a massive implosion in Venture that will take ten years for many to discover -- yet had been predicted by this annoying whistle blower all along.

At least now you know who he is.

A continued scarcity of tech IPOs means that the Obama Administration won't be able to count on Silicon Valley startups to help spark a job boom and help alleviate tough economic conditions for millions of unemployed.

Mr. Ackerman told SVW, "These days, tech startups have to rely on being acquired by a larger company once they reach a certain size because there isn't an IPO market to help them recapitalize and grow to the next stage. The largest expansion in jobs for a young company comes in the period after an IPO. If a company is acquired it doesn't lead to the same job growth."

But tech IPOs are unlikely to return to their former high levels because the infrastructure that supported and financed them has changed.

There used to be many boutique investment brokerages that had analysts following companies and sectors. After the dotcom bust many of those boutique brokerages disappeared or were acquired and now there is a massive shortage of analyst coverage. Without analyst coverage there is little liquidity in the trading of shares of small companies, and this discourages larger investors.

Mr. Ackerman said, "In 2007 we sold IronPort to Cisco for $830 million. This is a company that could have easily gone public but we chose to sell it. The lack of analyst coverage was a large factor in that decision."

Sarbanes-Oxely is another issue. Young companies have to bear the very large costs of compliance, reducing their earnings, which makes them look less appealing to investors.

And there are significant challenges in attracting investors in startups because of tax policies.

Mr. Ackerman has spent a lot of time in Washington, D.C. meeting with politicians and lobbying for the VC industry, seeking favorable tax benefits that would encourage investment in innovative companies. He says that venture capital is being regulated in the same way as hedge funds and private equity funds, which is wrong.

"Washington is trying to regulate the risk out of everything. We need policies that encourage risk taking, that encourage risks by entrepreneurs -- that's the way to create jobs."

He says that one staffer admitted to him that, "We don't really understand the issues around investing." His reply was, "That's fine but then don't pass legislation about issues you don't understand."

He is also highly critical of US immigration policies because they restrict US access to the world's most talented people. Attracting the best human capital is essential to maintaining US innovation yet many foreign-born top graduates of US universities are forced to return home.

"Every advanced degree issued by a US university should come with a green card attached," he says. "Otherwise we will lose our lead in innovation to China and India. Investment in startups is already pouring into those countries and it wont be long before it overtakes the US."

The following extracts are from: VC roast; how to take Venture for a ride:

- You give speeches to the world about free-markets from atop a comfortable perch of the most closed, dark, unregulated, in-transparent and proprietary market mechanism in the financial industry.

- You write on your blog that Venture is all about relative performance and then compare Venture indices with those of 100-year old asset classes (with nominal greenfield and growth), so Venture still looks like a “star”.

- You make the world believe that the best companies to invest in start with the discoveries from white males, under thirty, only a technology proposition, twenty miles from Sand Hill Road and built in a garage where you spoon-feed them $250K tranches, minimizing investor downside risk. Ignoring comfortably that the long-tail of viable ideas should just no longer be explored.

- You decline to discuss publicly any rounds of funding into portfolio companies and its valuations, because at some point that may actually lead to the discovery of your real knowledge, vision and merit of decision making in Venture, or what a fool you really are.

- You start raising new money, four years after your first, making it impossible for your LPs to establish the real merit of your initial investment thesis. You’ve just added another 12 years to your already comfortable existence and enjoy the stability of a more secure job than anyone else in government.

- You tell the world about how holistic your job really is, and how you as a member of the Venture sector are responsible for generating all these jobs, forgetting of course that you are mainly the matchmaker in the process (between the assets from LPs and Entrepreneurs) and it is not your money you put to work but the public’s money (dispersed through LPs to VCs).

This represented a 9% decrease in dollars, and 18% fewer deals compared with Q4 of 2009. However, this was higher than the year ago quarter, with $3.4 billion and 635 deals.

Here is the sector breakdown:

- The Biotechnology industry received the highest level of funding for all industries in the quarter with $825 million going into 99 deals. This level of investment represents a 24 percent decrease in dollars and a 14 percent decrease in deals compared to the fourth quarter when $1.1 billion went into 115 deals.

- Medical Devices and Equipment saw a 29 percent decline in dollars and 30 percent decline in deal volume in the first quarter with $517 million going into 61 deals. This sector ranked fourth overall for the quarter in terms of dollars invested.

- The Software industry had the most deals completed in Q1 with 144 rounds, although this represented a drop of 25 percent from the 193 rounds completed in the fourth quarter. In terms of dollars invested, the Software sector was in second place, declining 29 percent from the prior quarter to $681 million in the first quarter of 2010. The drop in the number of deals in the first quarter puts Software at the fewest number of deals since the fourth quarter of 1995.

- The Clean Technology sector, which crosses traditional MoneyTree industries and comprises alternative energy, pollution and recycling, power supplies and conservation, saw a 87 percent increase in dollars over the fourth quarter to $773 million. The number of deals completed in the first quarter increased 44 percent to 69 deals compared with 48 deals in the fourth quarter. The increase in Clean Technology investments was driven by several large rounds, including five of the top 10 deals. Internet-specific companies received $807 million going into 158 deals in the first quarter, a 14 percent decrease in dollars and a 19 percent decrease in deals over the fourth quarter of 2009 when $941 million went into 196 deals. 'Internet-Specific' is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company's primary industry category.

- Eight of the 17 MoneyTree sectors experienced dollar declines in the first quarter, including Media and Entertainment (29 percent decrease) and Networking and Equipment (53 percent). Sectors which saw increases in dollars included Semiconductors (52 percent increase), Industrial/Energy (12 percent), Telecommunications (89 percent), Electronics/Instrumentation (73 percent), Financial Services (47 percent), and IT Services (14 percent).

- Seed and Early stage investments declined in the first quarter, dropping 30 percent to $1.4 billion. The number of Seed and Early stage deals dropped 24 percent to 299 from the prior quarter. Seed/Early stage deals accounted for 44 percent of total deal volume in the first quarter, compared to the fourth quarter when it accounted for 47 percent of all deals. The average Seed deal in the first quarter was $5.4 million, up from $4.0 million in the fourth quarter. The average Early stage deal was $4.6 million in Q1, down from $5.6 million in the prior quarter.

- Expansion stage dollars increased 9 percent in the first quarter, with $1.8 billion going into 224 deals. Overall, Expansion stage deals accounted for 33 percent of venture deals in the first quarter, up from 29 percent in the fourth quarter of 2009. The average Expansion stage deal was $7.8 million, up significantly from $6.6 million in the fourth quarter of 2009.

- Investments in Later stage deals remained flat in dollars and fell 20 percent in deals to $1.5 billion going into 158 rounds. Later stage deals accounted for 23 percent of total deal volume in Q1, compared to 24 percent in Q4 2009 when $1.5 billion went into 197 deals. The average Later stage deal in the first quarter was $9.8 million, which increased significantly from $7.8 million in the prior quarter.

- First-time financing (companies receiving venture capital for the first time) dollars and deals decreased 14 percent with $972 million going into 208 deals. First-time financings accounted for 21 percent of all dollars and 31 percent of all deals in the first quarter, compared to 22 percent of all dollars and 29 percent of all deals in the fourth quarter of 2009.

- Companies in the Software, Biotechnology, and Financial Services industries received the highest level of first-time dollars. The average first-time deal in the first quarter was $4.7 million, which is unchanged from the prior quarter. Seed/Early stage companies received the bulk of first-time investments, garnering 56 percent of the dollars and 73 percent of the deals, but fell short of fourth quarter percentages when they accounted for 65 percent of the dollars and 77 percent of the deals
MoneyTree Report results are available online at http://www.pwcmoneytree.com/ and http://www.nvca.org/.

According to the KPCB VCs, there is a "brave new world" emerging and it is best typified by the iPad and its fluid, dynamic user interface.

On Saturday (April 3) the iPad arrived. We believe it will rule the world.
I've touched it, held it, and caressed it. It feels gorgeous.
It feels like touching the future.It is not a big iPod. But it IS a very big dea
We're going from the Old World to a brave New World.
* From the Old World of the traditional, tired window interfaces... to the wonderful new world of TOUCH.

* From the Old World of Point and Click to the new SWOOSH of Fluidity.
* Instead of old, artificial, indirect interfaces, the iPad is direct and NATURAL.
* Instead of WYSIWyg - what you see is what you get - it is WYTIWis. What You Touch... IS what IS.
* Instead of holding a MOUSE, you're holding MAGIC.

The authors compare it to the beginning of the PC industry, and to the time when they saw the first web browser.

OK, we get it, you really like the iPad.

But the world of Apple is not an open world, it is not built on the same open platform that built the PC industry, or the world of the Internet with its open standards.

The world of Apple is proprietary, it requires the Apple online store, it requires Apple hardware and software; it requires permission from Apple; it requires proprietary hardware you can only get from Apple.

That's not a world that is comparable to the PC industry or the online world of the Internet.

And it's also a litigious world. Apple is suing to protect its user interfaces and its proprietary technologies.

In the PC world, everyone cross-licensed technologies with each other because they knew that legal battles were bad for business. The PC industry tried to create as little friction as possible so that an open platform could support many companies and support continued innovation and low prices.

KPCB's iFund is focused squarely on Apple and while that's a smart move it's not the "Next Big Thing."

- - -

Here is John Doerr on the new iFund.

Freemium is not a new idea, companies have been giving away products and services for free for a long time but it is a new word -- popularized by Fred Wilson, a VC at New York City based Union Square Ventures. Chris Anderson, the editor-in-chief of Wired magazine, has also written about "free" business models.

A freemium model means that you offer a free version of your online service and try to convert some of those users to premium subscribers through offering additional features and value.

This business model can work very well for some companies -- especially the portfolio companies managed by Emergence Capital.

I spent most of Wednesday evening with Brian Jacobs and Gordon Ritter, general partners of Emergent Capital, and the CEOs of their most successful 'freemium' startups:

David Sacks, CEO, Yammer

Ivan Koon, CEO, YouSendIt

Brent Chudoba, VP Business Strategy, Survey Monkey

Umberto Milletti, InsideView

Jason Lemkin, CEO, Echosign

It was an excellent discussion and I came away with a notebook full of great content and it also sparked some new angles and ideas. It was also interesting to see how polarized the discussion became at times, and how the CEOs would band together on a series of points.

Emergence has the benefit of working with many companies in the enterprise space, so they can highlight best practices. Although the CEOs have a much narrower view, they know what it's like inside the trenches, and what is workable.

Here are some of my notes from the discussion:

- You can have a conversion rate of 2 to 4 per cent and still be successful with the freemium business model, says Ivan Koon.

- What should you do with your "deadbeat" users, the ones that won't convert to premium? Ivan Koon was in favor of cutting them off, once you have a 60 percent market share, and to stop accepting free users. Others said it was worth keeping them. I pointed out that with a 4 percent conversion rate you have a potential 96 per cent upside to play with.

Umberto Milletti said you should keep trying to entice your free users and that you mustn't use free trial periods because that's a power play, it means the company can take away a service and that users won't put up with that.

- Freemium means much lower, or virtually no marketing costs, said Brent Chudoba, and viral marketing helps bring new users. Survey Monkey users send surveys to thousands of people, which exposes the brand very widely.

- Where do you set your premium crossover? That depends on your service, your sector. Holding data hostage is not a good idea or doing a bait and switch -- switching off free users if they don't pay.

- Gordon Ritter focused on user data. He said that the companies were collecting lots of user data all the time and they needed to mine that data.

- Gordon Ritter also spoke about the need to do A, B, C, D, E testing. There was no sense in waiting around to see what features or what pricing would work when you could set up multiple tests to measure various aspects of your business.

The CEOs gave a bit of pushback on this point. Ivan Koon talked about using their intuition to know what will work and what won't. Umberto Milletti made a good point saying that his intuition has been wrong in the past, sometimes "shockingly wrong," and that testing was the best way to prove your intuition.

The CEOs said they didn't have the resources to carry out multiple tests and Jason Lemkin said it would mean certain planned features would be delayed.

I understand the pressures of startup CEOs, there are tons of things they could/should be doing, but it would require a week in every day to keep up.

- The human touch is important. When premium pricing reaches a certain level, it is important to have a sales representative talk with customers. This also gives an opportunity to up-sell or cross sell. The East coast digital camera stores are a good example, you have to call them to get their low prices but they generally manage to sell you extra memory, a camera kit, and some lenses too.

- Why don't free trials work? Umberto Milletti says it's because you can't create advocates for your service in 30 days, it takes longer.

- Gordon Ritter said that the companies have to think in terms of a machine, how to create a business process that acts like a machine. A machine means a service can be scaled -- if it is too dependent on humans, it can't be scaled.

- Is an ad supported model the same as a freemium model? I said no, partly because you don't want to have to start relying on online ads because the rates are low and moving lower. Online ads can bring a little extra revenues but, why give up that real-estate? Why not use that real estate on your web page to entice users to premium plans, or other services?

- David Sacks asked how do we fight commoditization of our business? That's an excellent question because the dirty little secret of freemium business models is that a competitor could offer a similar service for very little cost -- you have to find a way of differentiating your business, whether it is through community, great user experience, or something else.

- Should you get rid of your free users over time and just start charging?And can you charge a high price for your service if you have a large market share? Are you leaving money on the table by not pricing higher? The danger is that a competitor could come along and offer a freemium model priced under you. If you offer a free service, it creates an obstacle for a competitor, there is no price umbrella to shelter under. Thus, freemium can be part of a defensible business strategy.

- Brent Chudoba pointed out that if your service isn't something that is producing value, you don't have a business -- no business model, freemium or otherwise, will help you.

- Gordon Ritter continued to hammer home the point about testing, and mining user data. He pointed out that Marc Benioff (Emergence was an investor in Salesforce) is sitting on a huge mountain of user data. He can see what new features or applications it is worth launching, and what their monetization potential is.

- One of the CEOs pointed out that there hadn't yet been a large acquisition of a freemium company.

- Brian Jacobs wrapped things up, saying that there were still many questions around the freemium business model, and that it is still evolving.

It was an excellent discussion and for me, it sparked a lot of ideas that I'll be returning to in future posts.

Also, it struck me that there is a good roll-up opportunity here. I proposed that Emergence should combine its freemium portfolio companies, maybe add one or two more, and launch an IPO with the NASDAQ ticker FREE.

Salesforce is likely to do a roll-up, with the half-a-billion dollars it raised earlier this year.

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It's often difficult to put a value on private companies because their financial data is private. But you can get some sense of their value by tracking the buying and selling of private company shares, and that's what SharesPost does.

The company announced its first value index today comprised of seven leading venture backed private companies.

The private market is where VC and other rich individuals can trade shares in venture-backed companies. You could call it the "smart money."

But you might be in for a surprise as to what the smart money values.

- Zynga, the maker of the Facebook game Farmville, has a $2.61 billion valuation. Twitter has a $1.44 billion valuation. The smart money sees $1.17 billion more value in Facebook games than it does in Twitter.

- According to the SharesPost Index, Facebook has a valuation of $11.52 billion. That's a lot less than the $15 billion valuation it had in October, 2007 when Microsoft purchased a 1.6% share for $240 million.

It's a 23 percent devaluation despite the massive growth at Facebook since Microsoft's investment. And it hosts Zynga's games, that has to add to its valuation.

Here is the complete list of the companies in the SharesPost Index and their current valuation:

Facebook $11.52 billion.

Zynga - $2.61 billion.

Twitter - $1.44 billion.

Linden Lab (Second Life) - $383 million.

LinkedIn - $1.3 billion.

Tesla Motors - $1.28 billion.

Serious Materials (Cleantech) - $227 million.

Academia generally looks down upon entrepreneurs even as they teach entrepreneurship in business schools and other university programs around the world.

Meanwhile, I have come to observe that most business school programs have an extensive emphasis on fundraising, especially fromventure capitalists, and very little pragmatic understanding of what it really takes to get a venture off the ground.

As a result, business schools launch students into the real world with completely unrealistic expectations, set up to fail.

She writes that she solicited input about the need to teach bootstrapping skills but some responses were negative. And there is an assumption that only mom-and-pops businesses can be built with bootstrapping.

How very wrong! Ask Frank Levinson and Jerry Rawls of Finisar whose bootstrapped venture went public at a $5 billion valuation. Or ask Christian Chabot of Tableau Software, who raised his Series A from NEA at a $20 million pre-money valuation by bootstrapping the early stages, when typical valuations for that round are in the $2 to $5 million range.

I know that Greg Gianforte, CEO of RightNow Technologies would agree with Sramana Mitra. He is a very strong advocate of bootstrapping. Here is a column he wrote for SVW that lists the perils of VC money:

Seven Reasons Not To Raise VC capital

Raising venture capital for early stage start-ups seems to be the prevailing path for most entrepreneurs; however, most would-be founders should reconsider.

Here are some reasons why:

- If you start by selling your concept to potential prospects (rather than stock to VCs), you will either end up with initial customers or a conviction that your idea won't work. Why raise money and then find out which one it will be?

- Raising money takes time away from understanding your market and potential customers. Often more time than it would take to just go sell something to a customer. Let your customers fund your business through product orders.

- Adding VCs to the mix early gives you an additional set of masters you must serve in addition to your customers. It is always hard to serve two masters, especially in a startup.

- With no money you can't make a fatal mistake. This is a blessing. Without VC money, you are forced to figure out how to extract funds from your customers for value you deliver. Ultimately that is the only thing that really matters.

- Money removes spending discipline. If you have the money you will spend it - whether you have figured out your business model and market or not.

-Raising VC money determines your exit strategy. You will either sell the business or take it public. What if you end up with a very profitable, modest sized business that you want to just run? That is no longer an option once you raise VC money.

- You sell your precious equity very dearly before you have a proven business model. This is the worst time to raise money from a valuation perspective. I know this is a contrarian view. And some of you are saying that might be fine for a small company.

Don't forget Dell, HP, Microsoft all originally started without VC funding; you can build a big business with bootstrapping and without VC money. At RightNow, we doubled our revenue and employees every 90 days for two years before we took any outside money, and even then the employees retained more than 75% ownership after raising $32m.

Greg Gianforte is the author of:

"Bootstrapping Your Business: Start and Grow a Successful Company With Almost No Money."

http://venturecompany.com

Finding the perfect date

As a VC, finding the right type of innovation to monetize is like finding the perfect date, they are few and far between. And to a founder of a startup finding the right General Partner (at a VC firm) is similarly daunting.

A unique match between two people (the General Partner and the CEO) is something that takes more than glowing at the prospect of having a baby together (i.e. build a new prosperous company) and discussing the financial projections and terms of the deal.

Higher standards

The reason why many people are such bad daters is because they do not hold on to their own standards, those that make them happy and those that make them strong.

They confuse money, power and perks with merit and hope sheer proximity will someday rub some off to them. But it never does, you need to do the hard work yourself to reap its precious reward. You get what you put in.

Stay authentic

I cannot tell you how many times I have spoken to entrepreneurs that have banged their heads against the doors of VCs, and selectively served as their dutiful psychologist to help them not to bow down to sub-prime standards.

Most entrepreneurs become nervous and afraid to negotiate, because this VC may just be the only interested party they have, and if you are a tough negotiator those investors may frighten others that you are "hard to work with". But a choice of one investor is not a choice.

Even before any commitment to invest is reached, entrepreneurs frequently let VC change their business model, use-of-proceeds, valuation and everything else, in the hopes of landing a round of funding. Not realizing that this VC can have whatever opinions it wants, but as an entrepreneur you are the only one responsible for making it happen.

So, don't be afraid to lose. Because losing from a sub-prime VC really is a win.

Marriage does not make a person

Getting laid is not a recipe to produce a happy child, a healthy marriage is. So, even if an entrepreneur lands an investment, raising Venture Capital alone does not make a successful company. With so many sub-prime VCs, statistically and empirically the odds are still not in your favor.

Success, in the latter case, is defined by the company's ability to produce public value, either by serving the public directly or indirectly by getting them to invest by way of IPO (or acquisition).

So, both parties need to demonstrate that they are experienced, skilled, agree and contribute to achieving that (early) public value for the company. In other words, a marriage needs to be consummated in which the assets, principles and goals of raising a happy child (the company) is shared. And that means that while both parties supply different assets, one cannot overpower the other (like Pimps and Hoes) and force its agenda.

A priory, an equilibrium needs to be established that is healthy and promises minimal friction down the road.

Bad starts make for bad endings

Without an organic fit and chemistry, a venture deal that starts off wrong usually ends wrong. For the VC that damage is diversified, for the entrepreneur it is often crushing. So, the dating process is not just a way for the VC to check the entrepreneur out, but for the entrepreneur to gauge if the proposed equilibrium (mentality, experience, skills, term-sheet, vision) is authentic, attainable and healthy.

The date wants to know everything about you but won't tell much about himself.

VCs demand to know a lot about the entrepreneur, but what does an entrepreneur really know about the VC's merit? GP merit hides behind ten levels of diversification and a fuzzy Private Placement Memorandum (PPM, the business plan for LPs) that leaves plenty of room for "creative" post close re-interpretation. Whether the GP is a great gambler or skillful is impossible to assert. What we do know is that many GPs have never themselves crossed the chasm, a trait that would make them a much better dating partner.

The date wants to date other people at the same time.

VCs diversify their risk by investing in other (hopefully not competitive) companies at the same time and hedge their bets, they do not often hedge their often ill-informed opinions upon the entrepreneur. Expect many to do a John Edwards on you when your future suddenly looks like cancer.

The date does not want you to date someone else too.

VCs diversify their risk, but watch their reaction when you do the same. They'll get mad, because you have just told them that VC money is a commodity (and disruptive innovation is not) and now they need to step it up and prove their value-add. Right where you want them.

The date wants to have a threesome, and takes his pick.

VCs are more worried about downside risk than upside risk and try to find an accomplice, and syndicate early to avoid risk. They often finagle a sweet syndication deal with a partner under the table that is unlikely to be in your advantage. VC is a demi-cartel.

The date thinks that his money compensates for lack of empathy.

Many VCs lack entrepreneurial experience, which according to a Dutch saying means "they've heard the church bell ring, but they don't know where the sound came from". Money does not make up for in-experience and lack of skills, especially not in the boardroom of an early stage company.

The date wants you to tell him exactly what you are bringing to the table, without him doing the same.

Entrepreneurs are asked to make elaborate predictions about growth trajectories, and stick to them. But have you asked the VC to provide full runway support in return?

The date discusses divorce before you even start dating.

You want to change the world, the VC wants to target exits. Foolishly the sub-prime VC does not realize that changing the world creates a much more reliable exit than an early "delivery" could ever promise.

The date wants to know whether you want children, but withholds his wishes.

Real entrepreneurs want to change the world, not just to exit. VCs however will change their mind depending on how the rest of their portfolio is doing and whether at that time they can get themselves in the top-quartile. I know many companies that have been pushed to early "delivery", to the chagrin of their founders.

The date never really commits and keep all options open.

Entrepreneurs are forced to submit to funding rounds that are designed purely to minimize downside risk for VCs. While you commit to the marriage all the way, a VC can decide to bail out at any time, leaving you hanging (with a strategy that may not be yours, a cap-table that is destroyed and a runway that may no longer be viable).

The date wants full control over your purse.

Excessive controls on money means there is no trust between VC and entrepreneur. It is necessary to verify trust, but not giving it in advance means the entrepreneur is not giving the VC his trust either. A CEO needs to be able to run the company and not be bogged down by distracting and bureaucratic spending rules as long as he stays within the use-of-proceeds.

The VC institution needs to be fixed

The only way, in my view, we can fix Venture is to change the model by which we deploy the matchmaking services between the assets of the LPs (money) and the assets of the entrepreneurs (ideas).

With a more discretionary VC intermediary we will automatically attract more disruptive ideas (by stimulating entrepreneurs to look at Venture as a prime venue for innovation again) and create more meaningful value.

By the way, I do not dislike many VCs personally, I just despise the institution they represent - because it performs so poorly. That hurts LPs and their dissatisfaction will have a devastating effect to the innovation in this country.

And in the meantime, dear entrepreneur, if you think you have what it takes now, keep your foot down and your head up and keep looking for that discretionary VC in the haystack.

- - -

[If you would like to contribute a guest post please send it to foremski@gtmail.com]

Open Angel Forum does not charge startups to pitch. And it promises "A-list" investors.

The San Francisco chapter is headed by Kevin Rose, co-founder of Digg, and Chris Sacca, a top angel investor.

Tickets to attend the event are $1500. There are five startup spots - applications are here. Deadline is February 26.

Open Angel Forum is an event bringing together entrepreneurs, venture capitalists and industry professionals. We are not a venture capital or investment firm, but rather an event company. Our mission is to host events that are free to startups and investors.

Executives at a party, were fitted with devices that recorded 'social signals' such as their tone of voice, gesticuation, and proximity to others.

Five days later the same executives presented business plans to a panel of judges in a contest. Without reading or hearing the pitches, Pentland correctly forecast the winners, using only data collected at the party.

This study is one of several that found that it is possible to predict who will succeed in salary negotiatins, and in other busness activities. The researchers say they are monitoring 'honest signals." Professor Sandy Pentland says that 'honest signals' is a biological term.

They're the nonverbal cues that social species use to coordinate themselves--gestures, expressions, tone. Humans use many types of signals, but honest signals are unusual in that they cause changes in the receiver of the signal. . . If I'm happy, it almost literally rubs off on you.

He added:

The more successful people are more energetic. They talk more, but they also listen more. They spend more face-to-face time with others. . . It's not just what they project that makes them charismatic; it's what they elicit. The more of these energetic, positive people you put on a team, the better the team's performance.

Read the rest of this article here on Harvard Business Review:

Defend Your Research: We Can Measure the Power of Charisma - Harvard Business Review

Georges Van Hoegaerden has put together a very compelling list of reasons why VCs should be generating much better returns.

In his post Why do we keep listening to VC as the barometer of innovation? he writes:

- Technology has moved from hardware, to software, to software services with immediate market recognition and impact, allowing for simple business models and reduced risk with regard to customer adoption.

-The Internet with its ever increasing penetration provides a boundless addressable market for technology that a successful proposition can tap into at almost no additional expense.

- Until this year (thankfully LPs are now waking up) there have been truckloads of support from Limited Partners to the Venture sector, allowing VCs to pick their preferred fund size and implement their ideal diversification strategy.

- We produce more highly skilled local students and have access to a much larger petri-dish of (global) entrepreneurs than every before, that should account for a much larger supply of disruptive ideas and development resources.

- The penetration of applications to vertical markets (healthcare, oil and gas, real estate, etc.) remains pretty much untapped, leaving low hanging fruit investment opportunities unserved.

- The deployment of macro-economic principles with the application of technology to drive more efficient marketplaces remains untapped, leaving winner-takes-all investment opportunities unserved.

Excellent points. So why have many VC funds floundered?

Mr Van Hoegaerden believes it's because many VCs do not have the operating experience to manage investments, and that many VCs have been practicing a "micro" private equity approach to investments.

I keep hearing about a shakeup in the VC industry. I'm waiting to see what it looks like.